Are you considering buying a property for your children?

Are you considering buying a property for your children?

A child under 18 cannot take legal title to property, but there are two ways in which property can be held for them: a simple ‘bare trust’ or a more formally constituted trust, such as a ‘life interest’ or ‘discretionary trust’.

(1) Under a ‘bare trust’, the property title is registered in the name of, for example: ‘A as bare trustee for B’.

In all other respects, the child is regarded as the owner of the property and will automatically be entitled to take legal title to it when they reach the age of 18.

(2) Setting up a formal life interest trust or discretionary trust before choosing a property to buy. When the trust acquires a property, the title would be registered under something like: ‘A and B as trustees for the C Family Trust’.

In this case, it is the trust itself which is effectively regarded as the owner of the property and the child’s rights to the income from the property and to take title to it will depend on the terms of the Trust Deed.

A more formally constituted trust requires a Trust Deed, which is a legal document setting out (amongst other things) who the trustees are, who the trust beneficiaries are, and how and when the trust’s income and assets should be distributed to its beneficiaries. It is possible to have any number of beneficiaries, or just one.

The two main types of formally constituted trust:

Interest in possession trust:  in this case, the entitlement is fixed, and the beneficiary must receive the income or entitlement of the trust.Discretionary trust:  this type of trust depends on the discretion of the trustee. They have control as to when or whether any income or capital of the trust is granted to the beneficiary.


Income Tax – Parental Settlements Legislation 

Whichever type of trust is used, the major difficulty which arises is the parental settlements legislation. This legislation is triggered whenever there is any gift from a parent to their own minor child.

Hence, for example, it would be triggered if the parent:

  • gifts the property
  • pays the deposit for the property
  • contributes to the mortgage payments
  • acts as source of funds for the purchase

The effect is that all income from the property is treated as belonging to the parent for Income Tax purposes (subject to a general exemption for income not exceeding £100 per annum).

Where a ‘bare trust’ is used, the parent will be taxed on all of the rental profits at their top rate of Income Tax.

If a more formal trust is used, the parent will be taxed on any sum which would otherwise have been treated as the child’s income. With a life interest trust, this would again effectively be all of the rental profits. A discretionary trust could retain some of its profits, but this will not really help as profits in excess of £1,000 will be taxed at the higher ‘trust rate’

To avoid the settlements legislation would require the support of other family members, typically the child’s grandparents. If grandparents gift the property or pay the deposit, the settlements legislation is not triggered.

If parents contribute in any way to the running of the property (e.g. paying a utility or repair bill), there is a strong chance that the settlements legislation will be triggered. This could happen all too easily, especially if a ‘bare trust’ is being used where the parent may be the legal owner of the property and thus legally responsible for it.

Consider, therefore, ensuring that your child’s benefactor puts sufficient additional funds within it, as working capital, to ensure that you never have to make any contribution to the property.

Capital gains tax

If the property that’s put in a trust increases in value then capital gains tax will be charged against this gain. The person who’s responsible for paying capital gains tax depends on the situation. Upon putting the property into a trust, capital gains tax is paid by the person selling the property or the settlor. If the trustee then transfers or sells the property on behalf of the beneficiaries, they need to pay capital gains tax. Once the beneficiary becomes completely entitled to the property, they are then responsible for capital gains tax based on the current market value

Inheritance tax

Inheritance tax is due at the time of transferring property into a trust – at a rate of 20%. Trusts also occur 10-yearly inheritance tax charges. When the trust ends inheritance needs to be paid again in the form of exit charges.

It is always worth bearing in mind that if an asset is gifted and the donor survives for seven years the gift is free of inheritance tax. This is known as a Potentially Exempt Transfer (PET).

If you need further legal advice on gift, setting up a trust and estate planning matters, please get in touch with us at 020 8240 9018 or