Helping Your Children Mitigate Capital Gains Tax (CGT) on Second Homes

Current tax legislation states that there is no CGT payable on profits made through the sale of a person’s own home (Principal Private Residence).  However if that person owns a second home and makes a profit on the sale of this second home, Capital Gains Tax becomes payable on gains above the annual allowance, currently £11,000.

There is however an exception to this rule which involves the use of trusts and would enable your children to live in a second home and, in so doing, reduce the amount of Capital Gains Tax payable on the eventual sale of that property.

The first step is to set up a formal written discretionary trust where you are the trustee and your child/ children are the beneficiaries. You can also structure the discretionary trust so that you have a right to any income from the property.

You can also loan the trust the amount required for a deposit so that the trust can then take out a mortgage where you act as the guarantor for that mortgage.

Because your children are beneficiaries of the trust, they have the right to live in the property rent free as life tenants and to have their own “Principal Private Residence Relief”.

When you come to sell the property as trustees you will be able to utilise this Principle Private Residence Relief to avoid CGT on any profits made for the period that the children have occupied the property.

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.

This route is useful if you want to retain the entire value of the property.  However, because the value is now in the trust, it cannot be passed back to you.  It is also useful for Inheritance Tax Planning if you do not require the value of the property back as the value resides within the trust.

If however you just wish to protect the value of the deposit placed it would be significantly simpler to make a gift of the deposit to the trust which is then loaned to your children. You would act as a guarantor on the mortgage in the same way as stated above but now the property would sit within your children’s names as opposed to the trust.

Like all trust planning you would require advice from an experienced adviser.