It’s all about you

We support you and your business at every stage with expert advice that delivers outstanding results.

We provide audit, accounting, tax and business advice to individuals, family, and owner-managed businesses from across our offices in Leeds, Newcastle and York.

Andrew Cowe, Tax Consultant

This article appeared in the Yorkshire Post on Saturday 14 November 2009

How to avoid losing money down the generation gap

It is now a fairly common scenario for a property to be occupied, on either a temporary or permanent basis, by a relative of the legal owner.  When a child commences university education, for example, it is an ever more popular choice for parents to assist with accommodation costs by buying a property, rather than expending ‘dead’ money in the form of rent.  By allowing the child to live in one room whilst renting the other bedroom(s), a valuable income can be secured, partially or even fully covering the cost of the investment in the child’s education.

Conversely, often elderly parents may reside in a home funded and owned by children.  This can come about either via purchase by the next generation who have the means to ensure their parents live out their days in comfort, or because the parents were the legal owners but gifted the property in connection with attempts to plan for Inheritance Tax and/or care home fees.  We have seen many examples where such tax planning attempts have actually increased the tax exposure, and these plans should be reviewed to confirm if they are effective.

Whatever the circumstances, few families consider the Capital Gains Tax (CGT) implications of such a situation.  After all, main homes are exempt from CGT, surely?  Here though, the legal owner, the party entitled to the proceeds of any sale, has not been the actual occupier.  Therefore it is not his main residence being disposed of, and so CGT relief is not available.  HM Revenue & Customs regard such a property as an investment, a gain on which is certainly chargeable to CGT.

We can frequently remove this liability by utilising an extension to the CGT ‘main residence’ rules which apply to Trusts.  When Trust property has been occupied by a beneficiary, any capital gain on sale can be partially or fully exempt from CGT.  As such, it is desirable to show that property is effectively held on trust for other parties.  It should be borne in mind that this can be demonstrated without legal paperwork, although the existence of formal Trust documentation is of course preferable.

Whilst in an ideal scenario a Trust would be established at the outset, i.e. when the property is initially purchased or transferred into its current ownership, a properly and legally executed Trust Declaration can frequently bring property within the main residence rules despite it having been legally held by named, non-occupying individuals.

Taxpayers holding property for the use of relatives are rarely motivated by financial gain, but rather by the desire to see that their loved ones are well cared and provided for.  All the more reason to ensure that the proper advice and ownership structure is put in place so that the taxman does not share the benefit from such altruism, and impose tax which can instead be retained for the family’s benefit.