4 October 2022 by Hadley Long

Stamp Duty Land Tax Reduction – is wealth planning still necessary?

Following on from our article discussing the recent Stamp Duty Land Tax (SDLT) changes from a residential real estate perspective, we will now take a look at the changes from a wealth planning point of view.

As part of the recent “mini budget”, the Chancellor, Kwasi Kwarteng, announced significant reductions in the amount of SDLT payable when purchasing residential property.  For first-time buyers, no SDLT is payable on the first £425,000 (on homes up to a maximum value of £625,000).  SLDT at 5% is charged on the next £200,000, up to a maximum of £625,000.

For buyers who have bought previously (or first-time buyers buying over £625,000) no SDLT is payable on the first £250,000.  The next £675,000 is charged at 5% and the next £575,000 at 10%.

Difficulties for first-time buyers

Although these reductions in SDLT will be welcomed by many, first-time buyers still face substantial difficulties getting on the property ladder.  On 26th September 2022, the Evening Standard reported that London house prices rose by 2.1% in the last month alone, the biggest monthly increase of any UK region and that, annually, this means the capital has seen a 6.9% rise in the value of its homes, to an average of £682,499.  Saving a large enough deposit can sometimes feel impossible.

How parents can help

It is no wonder that people wanting to buy their first home are increasingly turning to their parents for financial help. For parents wanting to assist their children, it’s good to know what tax issues can arise and what the options are.

Buying in the child’s name

This option is good for inheritance tax (IHT) because, if the parents survive the purchase by seven years, the value of the property is outside of their estate for IHT.  It is also good from a capital gains tax (CGT) perspective because, if the child occupies the property as their home, principal private residence relief should be available on a subsequent sale.  If the child is a first-time buyer, the new SDLT regime will apply. The disadvantage of this arrangement is that the parents have no control over the property at all and many will feel that this option is just too risky.

Buying in the parents’ name

Buying in the names of the parents allows the parents to retain control over the property. However, if they are already homeowners, they will not qualify for first-time buyers’ allowance and the less generous SDLT rates will apply.   This option is not helpful for IHT as the property forms part of the parents’ estate and there would be no principal private residence relief for CGT.

Buying as bare trustees

A bare trust is a very simple trust.  It allows the parents to retain control over the property whilst taking advantage of the tax rates that apply to the child.  This is possible because a bare trust is transparent for tax purposes.

If the child is a first-time buyer, they will benefit from the new more generous SDLT allowances.  The arrangement is also good for IHT because if the parents survive the purchase by seven years, the value of the property is outside of their estate.  If the child occupies the property as their home, principal private residence relief for CGT should be available.  Finally, if the child moves out and the property is rented to tenants, the rental income would be taxed as the child’s income.

This arrangement is not without drawbacks.  The child has the right to demand the property at any time (although whether they would ever do so is another matter) and the parents cannot change their minds and ask for the property to be returned. As with all express UK trusts, a bare trust must be registered with HMRC’s Trust Registration Service.

Bolt Burdon’s Wealth and Estate Planning team can advise on all types of trust, including bare trusts.  If you would like more information about how this sort of planning could help your family, please get in touch.

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