The tax ad­van­tages of shar­ing property with the fam­ily

Yorkshire Post - Property - - PROPERTY - Rob Dur­rant-Walker

IF you have fam­ily, there may be ad­van­tages in in­volv­ing them in some form of shared own­er­ship of property, but there are also risks.

We wouldn’t gen­er­ally ad­vise gift­ing any part of your own home, so this ar­ti­cle is rel­e­vant to read­ers who have a sec­ond property, or who might be think­ing of buy­ing a sec­ond or sub­se­quent property.

If you have chil­dren, then trans­fer­ring a let property or part of a let property to your mi­nor child so that they can ben­e­fit from let­ting in­come might sound like it could be a sen­si­ble idea.

How­ever, that might not nec­es­sar­ily be the case. If you are think­ing of us­ing your young child’s per­sonal tax al­lowances and lower rate tax bands to save money, un­for­tu­nately this isn’t ef­fec­tive for in­come tax pur­poses.

Aside from the first £100, any in­come will still be taxed on the parental donor at the par­ent’s own tax rate, though the child can still re­ceive the ac­tual in­come.

For tax pur­poses a “mi­nor” is a child 18 years of age or younger. There is no such in­come tax re­stric­tion for a gift from a par­ent to adult off­spring.

In con­trast, there is no tax re­stric­tion on the in­come that any grand­child can en­joy from an as­set do­nated to them by a grand­par­ent.

But for any sub­stan­tial gift be­tween fam­ily mem­bers “as­set pro­tec­tion” is also an im­por­tant con­sid­er­a­tion.

Once the child turns 18, they are likely to have full ti­tle to the in­come and cap­i­tal that you have gifted to them. Are they go­ing to use the property and the in­come sen­si­bly (in your view, not theirs that is), or are you in the good po­si­tion of be­ing able to trust their judge­ment?

You have to think of the worst case sce­nario. Will that share of property be part of their po­ten­tial di­vorce set­tle­ment and exit the fam­ily en­tirely?

For rea­sons of pro­tec­tion alone, many fam­i­lies use a trust to hold the as­set with the chil­dren or grand­chil­dren as ben­e­fi­cia­ries. A trust’s as­sets can­not form part of their di­vorce set­tle­ment, be­cause a ben­e­fi­ciary does not legally own the as­set. Nei­ther can a child sell a trust as­set – that is only for the trustees to de­cide, and they are bound by an im­plicit duty to do what is in the best in­ter­est of each and ev­ery ben­e­fi­ciary of that par­tic­u­lar trust. As yet un­born grand­chil­dren can be in­cluded in the trust too, by adding them as a gen­eral class of ben­e­fi­ciary.

Shar­ing property in­come with your spouse or part­ner, or other fam­ily mem­ber can be tax ef­fi­cient if they are li­able at a lower rate of tax and you are gen­uinely pre­pared to give them the share of in­come and property own­er­ship. For in­come shar­ing, tax rules mean that a property that is owned jointly by hus­band and wife or civil part­ners is deemed to be owned 50:50 for in­come tax pur­poses even if the ac­tual ra­tio of own­er­ship is dif­fer­ent. For ex­am­ple, where a res­i­den­tial property is owned in the pro­por­tion 25:75 by hus­band and wife is let, HMRC will still re­quire them to re­port the in­come 50:50 on their tax re­turns, and there are penal­ties for get­ting it wrong. They can only re­port the in­come 25:75 if they have sent HMRC a for­mal elec­tion that they wish to be taxed on the ba­sis of their ac­tual own­er­ship, and it will only ap­ply to in­come af­ter the date of the elec­tion. This strin­gent re­quire­ment is only ap­plied to spouses or civil part­ners, and if that same property had been owned 25:75 by sib­lings they could re­port the in­come to HMRC in that pro­por­tion with­out no­ti­fy­ing HMRC first. Ex­cept for spouses and civil part­ners, any joint property own­ers can agree to split the property in­come how they wish to re­gard­less of the un­der­ly­ing pro­por­tion of own­er­ship.

As long as the in­come is ac­tu­ally split in that pro­por­tion, then it will count for tax pur­poses too.

If you are plan­ning on mak­ing a gift of property, there may be po­ten­tial cap­i­tal taxes is­sues to con­sider first.

Newspapers in English

Newspapers from UK

© PressReader. All rights reserved.