Helping Children onto the Property Ladder Plan

What is it?

The Helping Children onto the Property Ladder Plan comprises a trust deed designed to protect a property that you are purchasing for your children from third party claims (such as might arise, for example, on divorce) and which ensures that your chosen trustees retain control of this valuable asset until you feel that your children are ready to take control themselves.

Who is it for?

The Plan is suitable for all parents who wish to help their children enter an ever more competitive property market but who wish to ensure that their investment is not put at risk.

How does it work?

When you make the decision to help your children step onto the property ladder there are two options open to you. The first is to give the purchase price to your child for them to buy the property outright in their name. Whilst this has the benefit of simplicity, this route also has several significant is advantages:

Your child will be able to deal with the property as they wish, including mortgaging it to raise funds for purposes which might not meet with your approval or even selling the property and spending the proceeds. He or she can also leave the property to a beneficiary of their choice in their Will.

As your child would own the property outright, if they were to marry and divorce, or to find themselves in financial difficulties, then the property would be available as a financial asset in the divorce settlement or to pay their debts.

This Plan uses a trust to provide a protective “wrapper” ensuring that your investment is not put at risk as outlined above. Whilst in the trust the property is held in the names of the trustees (which can include you and other people of your choice) who will control the property and its sale. Crucially,
the property is not your child’s asset, and if he or she were to divorce or run into financial difficulties, the property is ring-fenced and should not be available to settle these claims.

What are the tax savings?

The Plan is primarily designed to be a protective device to ensure that the value of your gift benefits your child and not third parties. The initial gift into the trust will be a chargeable transfer for IHT purposes meaning that if the gift exceeds the IHT nil rate band then there will be an immediate 20% charge to IHT on the excess. However, if the gift is made by both parents, two nil rate bands are available meaning that only gifts in excess of £650,000 (assuming that no other lifetime transfers
were made in the seven years before the gift) are immediately chargeable to IHT. So for the majority of people there will be no immediate IHT charge on using the Plan.

The Plan can save IHT in that the gift will fall out of your estate after seven years potentially saving 40% of the value of the gift in IHT.

If a discretionary trust is used it would be liable to pay IHT charges at a current maximum rate of 6% every ten years but again this would only be an issue for properties of reasonably substantial value (£650,000 in the tax year 2018/19 if the gift is made by a couple and two trusts are used).

Discretionary trustees also pay the Stamp Duty Land Tax surcharge (3% above usual rates) on a purchase of property, so it may be advisable for this reason to use another form of trust. In order to preserve Stamp Duty Land Tax first-time buyers relief, it may be advisable for the trustees to loan the purchase price of the property to the beneficiary rather than the trust itself making the purchase. We can discuss this with you.

Case study

Mr and Mrs Smith decide that they would like in due course to help their daughter, Laura, pay her first home. Laura is not yet settled in one place but her parents would like to take steps immediately to reduce the inheritance tax liability on their estates. They also like the concept of creating a fund that could also benefit any children Laura might have in the future.

They therefore set up a discretionary trust for Laura and any future children. The clock starts ticking immediately on the seven year survivorship period necessary for the cash given to the trust to fall out of the Smiths’ estates. When Laura is in a position to buy her first home the trust lends her the purchase price secured on the property. When Laura’s new business hits financial difficulties the trust’s interest in the property is secured in priority to Laura’s unsecured creditors. By comparison if the money had been given to Laura outright her property would have been available to meet her debts.

The trust has proved to be an effective protection mechanism while allowing the Smiths to start reducing their tax liability as soon as possible.

What will we provide you with?

This Plan consists of:

• a trust deed to receive the funds to purchase the property;
• a letter of wishes recording your wishes with regard to the future of the property; and
• preparation of all necessary IHT returns to HMRC concerning the gift.

We can also offer ongoing trust management services (including the preparation of annual trust income tax returns if required and all future IHT returns) for an additional fee.

The cost

A due diligence and advice report will be prepared for £1200 plus VAT. The trust deed costs from £2900 plus VAT. Preparation of an IHT 100 costs £600 plus VAT and registration with the Trust Registration Service from £600 plus VAT.