Help your kids buy a home – and avoid inheritance tax in the process
This is a four-part series about helping your family move up the property ladder – without paying unnecessary tax dollars. In the first two installments, we looked at the pros and cons of freeing up equity and secured mortgages. This week we take a look at the practicalities of trusts
The ‘Mum and Dad Bank’ will help half of all first-time buyers move up the property ladder this year, with parents offering or lending an average of £ 58,000.
Family members are expected to distribute a record £ 9.8bn to their children in 2021, according to forecasts by real estate agency Savills. Mommy and Daddy’s Bank, and its counterpart the “Grandmother and Grandfather’s Bank,” have been heavily cited thanks to sky-high property prices, but generous benefactors need to be aware of the tax traps along the way. .
For generations, the notion of trust has been associated with the super-rich, and their popularity has declined in recent years. However, they can be a convenient way to manage inheritance rights for parents or grandparents who are hoping to build an estate for the future of a loved one.
Placing money in a trust, as opposed to a simple gift, also protects against the risk of funds being wasted by young beneficiaries or lost through failed relationships.
Estate tax savings
When money is transferred to a trust, if certain conditions are met, it is no longer included in the benefactor’s estate for inheritance tax purposes.
But that doesn’t mean that parents or grandparents completely lose control over funds.
Clare Jeffries, of the Russell-Cooke law firm, said: “You can put money in a trust for the children and grandchildren to buy a first home, but stay as the trustee to decide how. and when that money is distributed to beneficiaries.
“In terms of the donor’s IHT planning, investing assets in a trust can remove them from the donor’s taxable estate, avoiding the 40pc IHT fee, provided it is done at least seven years before the donor’s death. “
The seven-year clock begins counting as soon as assets are placed in a trust, although funds can also be added in stages rather than as a lump sum.
“It can also be distributed to beneficiaries all at once or at intervals – for example, to give each of several beneficiaries a down payment to help buy a property as and when they need it, or to cover d ‘other purchase costs such as mortgage payments,’ Ms. Jeffries said.
When a parent or grandparent creates a trust, they decide the rules for its management, such as whether the beneficiary receives the funds at a certain age. The trust can also cross generations, as it can last up to 125 years, and therefore parents and grandparents can use it to pass the wealth on to unborn children or grandchildren.
The maximum that can be placed in a trust under the currently available IHT allowance is £ 325,000, and a couple could transfer up to £ 650,000 in this way.
This would use the tax exemption threshold for the next seven years, but after that period the exercise could be repeated.
However, there is an administrative burden attached to trusts, such as regular income tax returns, accounts and, depending on the type of trust, income tax and capital gains tax payable. In some cases, it may be easier to offer first-time homebuyers their down payment.
“The administrative burden can be a price to pay in order to maintain some level of control and protect assets from the obstacles on the road that young people can often encounter,” Ms. Jeffries said.
Placing the funds from the home’s deposit into a trust not only helps protect the tax money, but also from family fallouts, marriage breakdowns, or naive spending.
Ms Jeffries added: “If there are concerns about a young person’s relationship or their ability to handle money, then the trust could lend the money instead of giving it no strings attached.
“The trust then has the option of recalling the funds to repay the loan, rather than having them disappear if a relationship breaks down.”
There are many types of trusts and while the simpler ones have minimal cost, the more complex structures have strict tax rules and can come with hidden costs, Ms. Jeffries warned.