Where Taxpayers and Advisers Meet

Buy A Property with Mum and Sister

KartRacer
Posts: 4
Joined: Sun Dec 18, 2011 12:28 pm

Buy A Property with Mum and Sister

Postby KartRacer » Sat Aug 12, 2017 9:28 pm

Mum has recently been widowed and we need to move her nearer to us to live.

Property price regional variations means that me and my sister will need to purchase the new property with mum.

I understand one option would be to create a discretionary trust to buy the new property.

Mum uses her equity to fund the trust and the trust takes out a mortgage for the difference with a guarantee being given my me and my sister.

Mum can live in the house. How would the mortgage payments Ben handled, Mum me and my sister would all contribute to the mortgage payments.

maths
Posts: 6803
Joined: Wed Aug 06, 2008 3:25 pm

Re: Buy A Property with Mum and Sister

Postby maths » Sun Aug 13, 2017 8:16 pm

What are you trying to achieve?

Why are you discussing use of a discretionary trust?

KartRacer
Posts: 4
Joined: Sun Dec 18, 2011 12:28 pm

Re: Buy A Property with Mum and Sister

Postby KartRacer » Mon Aug 14, 2017 10:59 pm

I had read an article on the telegraph website that looked a purchasing a property for children and minimising CGT.

Whilst in this instance the property is not for children, but with children taking an equity stake.

The article described using a discretionary trust


The best way to do this is to set up a formal written trust, before you buy the property, with one or both parents named as the trustees. A solicitor can help you do this for a fee of a few hundred pounds.
Rather than purchase the property privately, you loan the trust the deposit and the trust takes out the mortgage. You will usually need to guarantee any mortgage in your own name because banks are otherwise reluctant to lend to trustees.
A “life interest trust” allows you to name a single child as a beneficiary, and that child also has a right to the income from the property.
A “discretionary trust” allows you to name any number of children, or other friends or family members for that matter, as beneficiaries. With a discretionary trust there is no automatic right to the income but you can structure it in this way if you choose.
With both types of trust, the named beneficiaries can become what are called life tenants, which gives them the right to live in the property rent-free.
A discretionary trust is a more flexible arrangement because one child could occupy the property for three years – while they are at university, for example – then a younger sibling could take over the property at a later date. There is no limit to the number of times the occupier can change, as long as they have the right to occupy the property rent-free under the terms of the trust.
By naming your children as beneficiaries they effectively trigger their own “principle private residence relief” when they move into the property. This is the relief that exempts a homeowner’s main property from CGT.
When you come to sell the property as trustees, you can claim the exemption for the whole period of ownership as long as it has been occupied by at least one of the named beneficiaries at all times.
Your own principle private residence relief on your home is not affected and there is no limit to the amount of gains you can take tax-free through this arrangement. There is also no income tax due on the sale.
If your children move out of the property, you have 18 months to sell it before a capital gains tax liability would start to accrue. Within this 18-month period you can let it out to any tenants you like and it will not affect the CGT exemption.
Outside of the 18-month period, if the property is not occupied by a named beneficiary, CGT may be due for that period.

maths
Posts: 6803
Joined: Wed Aug 06, 2008 3:25 pm

Re: Buy A Property with Mum and Sister

Postby maths » Tue Aug 15, 2017 12:45 am

Why not as follows: once mother has sold her current home, for the three of you to obtain the mortgage and purchase the new property. A declaration of trust is effected under which mum owns say 100% of the beneficial interest.

On her death under her will she then leaves the property to you and sister. No CGT arises.

If she decided to sell (eg to downsize) prior to death then on sale, again, no CGT would arise.

The property on her death comprises part of her estate for IHT purposes. However, in addition to her nil rate band (£325,000; possibly also an additional nil rate band?) she would also be entitled to a residence nil rate band (£100,000 or possible slightly larger).

KartRacer
Posts: 4
Joined: Sun Dec 18, 2011 12:28 pm

Re: Buy A Property with Mum and Sister

Postby KartRacer » Wed Aug 16, 2017 2:01 pm

Thank your for this Maths, I apologise for not providing sufficient info in my original question.

Given that Mum will be the person with the cash equity, we had not considered a joint mortgage with Mum and if we are honest, we had assumed that getting a joint mortgage with mum would not be possible due to her age, 70+

This has provided an extra insight for when we sit down to discuss with our mortgage adviser.


Return to “Property Taxation”