Property purchase for minors (in trust etc)

[slangking]

Hello

My father (80 YO) wishes to fund a property for his grandchildren (my children), they are both under 18. I would look after all domestic matters (I guess) but prefer not to be involved financially.
Budget is around 270k and ideally we would like it to return a rental income with any nett profit going back into a fund/trust etc exclusively for them. So said income would need to be able to cover maintenance costs/repairs etc. Also would like if at all possible for any said funds to be available for education fees/costs etc pre or post 18 yrs old. Ideally would not want the children to have control until they are (for example) mid 20's (2 years between them) if this is possible.

Looking for a tax efficient approach wrt inheritance, income, cap gains etc, if anybody can give me a starter I would be grateful

Thks in advance

P

[maths]

The trust which offers most flexibility and allows for future circumstances to be taken into account is a discretionary trust.

[slangking]

Thanks for the pointer..

[AGoodman]

The most tax efficient is a bare trust because income will only be taxed at the children's marginal rates.

The downside is that they could (in theory) demand the trust fund when they turn 18.

A discretionary trust gives you the additional control to keep the funds in trust but there will be additional tax - e.g. the trust pays an initial 45% income tax which can only be reduced if the income is distributed (paying school fees should count as a distribution). If the value is over £325,000 (under current rules) there will be a charge of 6% of the excess once every 10 years.

There are also SDLT consequences - e.g. the trust will pay the additional 3% rate, although I think that may be the case for a bare trust as well if you own a property (because your ownership is imputed to the children) You'd need to check that.

[maths]

I think the key issue is whether you wish the grandchildren to take the property at age 18 or not; the bare trust is probably not the way to go if you don't want kids taking at age 18.

Re SDLT, where a trustee purchases a residential property to hold on a bare trust (whether for a minor or not) the rate of SDLT is determined by reference to the status of the beneficiary ie not the trustee; the new exemption applies for property worth less than £500k.

Purchase by discretionary trustees up to £500k would give rise to a 3% SDLT charge.

[slangking]

Thanks for the replies both, very helpful. 45% is indeed a large hit for a DT. Will seek legal advice of course as part of purchase/conveyancing but sounds like a BT would be better in this respect (even if it legally becomes theirs at 18, I guess (gulp)). Any similar advice on these 2 approaches with respect to inheritance tax ? - if the grandfather funds the purchase directly ? - the allowance/threshold looks like it is 325k (I assume this can be split between each child) and as the amount is under the threshold is it true to say that inheritance tax would not be applicable ?

[AGoodman]

No inheritance tax to pay upfront but if the value going in is £260k or more, he will need to file an inheritance tax return.

If grandfather survives 7 years and gets no benefit from the trust, it will fall out of his estate for IHT. If not, the sum put into the trust will absorb his nil rate band.

[slangking]

Thanks again..
Might be a strange / further question - if a BT do the kids actually need to know (at age 18) that they are in control (as it were).. is there some formal/legal process that informs them /hands over the property and requiring their involvement or could it still be managed by the parents?

[AGoodman]

They need to know from 18 in practice because the income is theirs so they will need to record the income on their tax return and sign it personally.
In earlier years, the parents can do their tax return for them.

[maths]

This query crops up quite often.

There are two aspects. First, a sui juries beneficiary is entitled (i.e. has a right) to be told that he/she is a beneficiary. Second, the trustee(s) are under a duty to notify the beneficiary that he/she is a beneficiary of such and such trust.

It is also perhaps worth noting that although it is widely stated that a beneficiary of a bare trust has at age 18 the right to call for the trust property this is not necessarily the case; for example, where the trustees have a power of advancement