30 finance
How to buy your children a house and pay no tax
Owen Kyffin, tax expert and director of Whitley Stimpson, the largest independent firm of accountants and business advisers in the M40 corridor with offices in Banbury, Bicester and High Wycombe, outlines how you can help your children in their early adult lives by buying a second home without falling foul of the rules governing capital gains tax
Rising property prices are putting home ownership out of reach for young people.
However, you can help your children by buying a second property that they can live in rent-free and save for a deposit on a house of their own without you being liable for capital gains tax. Not only that, you can take this course of action without affecting the capital gains exemption on your own home.
You can do this by buying a property after setting up a trust, which you can do relatively easily and cheaply, with one or both parents being the trustees. Rather than buy the house for your children yourself you can lend the trust the deposit and take out a mortgage
on behalf of the trust, although you may have to guarantee any mortgage in your own name.
My preference is to set up a discretionary trust, which allows you to name any number of children, or friends or family members, as beneficiaries. Your children will not have an automatic right to any income if they share the house with a flatmate, for instance, but you can structure the discretionary trust for them to receive income if you feel this is the right thing to do.
Either way your children can become “life tenants”, which means they have the right to live in the property rent-free.
When you come to sell the property
Share buybacks – income tax or capital gain?
Private companies often remove a shareholder using a company buyback of shares out of distributable reserves. This is a common transaction but the tax treatment can give rise to some nasty surprises, writes Holly Bedford, tax director, HMT
Most shareholders expect to pay capital gains tax (CGT) possibly with entrepreneur’s relief giving a 10% tax rate. However, the default position is that a buyback is taxed as a distribution, to the extent that the price exceeds the original share subscription amount. If the shareholder is not the original owner of the shares, the distribution is still calculated by reference to the subscription price not the amount the current shareholder paid for the shares.
However, if certain conditions are fulfilled (on which advance assurance can be sought from HMRC), tax treatment automatically reverts to CGT instead. The conditions, in brief, are:
www.businessmag.co.uk
• The company is an unquoted trading company or holding company of a trading group,
• The shareholder is a UK tax resident,
• They have held their shares for at least five years,
• They are not connected with the company after the buyback (more than a 30% interest),
• They reduce their interest in the company by at least 25% as a result of the buyback
• The buyback is to benefit the trade. This test is subjective.
The company has to report to HMRC any CGT buyback within 60 days of the transaction.
Which treatment is most tax
efficient will depend on whether the taxpayer is a basic rate taxpayer or not, whether they could claim entrepreneurs relief, and whether they are original subscribers. If a dividend is more efficient they may wish to “fail” the CGT conditions.
A further trap is where the payment exceeds the market value of the shares and the departing shareholder is or was an employee or director. The excess is taxable as employment income rather than capital gains. As the shareholder is receiving cash, the company has to operate PAYE and NIC. We have seen a client assessed by HMRC on a share buyback that occured almost six years previously, therefore, we recommend that
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 that period,
if the property is not occupied by a named beneficiary, CGT may be due for that period.
I would stress, however, that although this method of helping your children onto the property ladder is not too complicated, you will need a solicitor to draw up the trust and you should also consult your accountant or business adviser to make sure all the procedures are followed to the letter.
Details: Owen Kyffin
owenk@whitleystimpson.co.uk 01295-270200
clients undertake a share valuation at the time of a buyback and agree this with HMRC for certainty. If the buyback is at a clear undervalue, this can also have tax consequences.
Under company law, a share buyback must be fully paid in cash at the time. If the company does not have enough cash, there are a number of solutions outside the scope of this article such as a series of buybacks, a loan back from the shareholder to the company or using a “newco” structure instead of a buyback.
The tax team at HMT led by Holly Bedford provides specialist advice to shareholders, management and companies on acquisitions, disposals and corporate restructurings.
Details: Holly Bedford
hbedford@hmtllp.com 01491-579740
www.hmtllp.com
THE BUSINESS MAGAZINE – THAMES VALLEY – APRIL 2015
Page 1 |
Page 2 |
Page 3 |
Page 4 |
Page 5 |
Page 6 |
Page 7 |
Page 8 |
Page 9 |
Page 10 |
Page 11 |
Page 12 |
Page 13 |
Page 14 |
Page 15 |
Page 16 |
Page 17 |
Page 18 |
Page 19 |
Page 20 |
Page 21 |
Page 22 |
Page 23 |
Page 24 |
Page 25 |
Page 26 |
Page 27 |
Page 28 |
Page 29 |
Page 30 |
Page 31 |
Page 32 |
Page 33 |
Page 34 |
Page 35 |
Page 36 |
Page 37 |
Page 38 |
Page 39 |
Page 40 |
Page 41 |
Page 42 |
Page 43 |
Page 44 |
Page 45 |
Page 46 |
Page 47 |
Page 48 |
Page 49 |
Page 50 |
Page 51 |
Page 52