10 January 2023
Helping a family member with a house purchase has typically been the preserve of parents wanting to help their children onto the property ladder. However, as mortgage lending criteria become stricter, and age and affordability calculations a barrier for some, it is increasingly common for older parents to turn to their adult children for help in securing a mortgage for a new home.
Specialist mortgage products are available for individuals looking to take out a loan on behalf of another family member, like an elderly relative, if they are unable to secure one themselves. Understandably, the resultant tax implications may take a back seat to resolving the practical issue of acquiring a home. However, failure to consider how best to structure such arrangements could store up a costly tax bill down the line. In particular, if a residential property is acquired for another family member, this can trigger both an additional property stamp tax cost on acquisition and a capital gains tax (CGT) liability on the eventual sale of the property.
The extra stamp tax cost that can arise is the additional 3% stamp duty land tax charge in England and Northern Ireland, 4% land transaction tax charge in Wales or 6% (4% prior to 16 December 2022) land and buildings transaction tax charge in Scotland that is typically payable on an individual’s acquisition of an interest in a second residential property, even if that property is for a relative to live in. Similarly, a CGT liability can arise on the future sale of a residential property if the individual who owns it does not live in the property as their main residence.
Such tax charges can therefore arise in circumstances where an adult child acquires a property for their parents to live in, rather than live in the property themselves.
Special provisions previously existed which provided CGT relief on the sale of such a property in circumstances where no rent was paid, and the dwelling was solely occupied by a dependent relative. However, this relief was broadly withdrawn for sales of residential property after 5 April 1988, subject to some rare exceptions.
If a family finds itself in this type of situation, it may wish to consider using a trust structure to acquire the property. For example, a property could be legally owned by an adult child but the beneficial entitlement to the property could remain with the parents. This is commonly known as a bare trust arrangement and could result in CGT relief being available and no additional stamp taxes cost arising.
Similarly, it might be possible to establish a discretionary trust that could then acquire a property, with the parents as beneficiaries of the trust. That route can also allow for CGT relief on the future sale of the property. However, there is more complexity in establishing a discretionary trust and it is important to be aware that inheritance tax costs can arise on the establishment and throughout the life of discretionary trusts.
Finally, in many family situations, consideration of the tax consequences of property ownership may not take place until there is a sale of the property. In such circumstances, there may still be an opportunity to claim CGT relief if it can be established that a constructive trust exists. This will depend on the circumstances and the intention of all the parties at the time of acquiring the property and, by its implied nature, may be harder to evidence to HMRC.
Unfortunately, it seems no good deed goes unpunished when helping a parent with a property purchase, but there are steps that can be taken to reduce the tax impact.