The slump in property prices will have made many people consider whether buying property for their children to occupy whilst at university is cost effective.
However, given the currently low prices, if you're looking at the long term with perhaps other family members occupying the property and also renting it out to third parties it can still be a worthwhile investment.
If you were looking to structure such an investment you have three main options:
Firstly you could purchase in your name
Secondly you could purchase in your child's name
Thirdly you could use a trust
Unless you're a non dom there would be no advantage to using offshore structure here, so we'll just consider UK trusts.
Purchasing in your name
If you purchase in your name you obviously have total control over the property, however it is generally a tax inefficient option.
As you haven't occupied the property as a main residence you won't get principal private residence ('PPR') relief on a disposal. In addition the property will remain within your estate for inheritance tax purposes.
Purchasing in your children's name
There is an immediate inheritance tax advantage as after 7 years the value gifted will be excluded from your estate (provided you don't continue to benefit from the property).
However the PPR relief position would not be straightforward. If you purchased in the name of one of your children they would only obtain PPR relief to reduce the gain on a disposal for the period that they actually occupied the property. If they occupied the property for say 4 years and then another sibling occupied it there would not be total relief from tax on the disposal.
Even if you purchased the property in multiple names unless they all occupied the property for the entire period of ownership (except for the final 36 months) there would not be full PPR relief. The other disadvantage of purchasing in your children's name is that they would have full control over the property (although you could mitigate this with a charge over the property).
Using a trust
In most cases using a trust would be a very attractive option. It provides for flexibility in terms of the occupation, gives you some element of control and also has significant tax advantages.
Consider the following arrangement:
You establish a trust and transfer funds into it to buy a property;
Trustees are appointed to manage the trust - these can be family members if you choose, but you can also appoint a Trustee Company, which is set up specifically to act as a professional trustee
The trust purchases a property for £300,000 which is then occupied by "child-one" as his / her principal private residence for three years;
On graduating "child-one" moves out and the property is let for two years until "child-two" moves in;
"Child-two" then occupies for four further years;
The property is then let for six years and finally sold for a gain of £200,000 after ownership for 15 years.
The main benefit is terms of Capital Gains Tax. Assuming CGT is paid at 28%, the tax due would vary considerably. If the property had been bought by:
a. you, the tax would be £44,800;
b. your child, it would be £22,400;
c. the trust, it would be £NIL.
As the property is occupied by more than one beneficiary this enables the trust to benefit from a number of aspects of the principal private residence relief whilst also benefiting from letting relief.
The occupation by two children as beneficiaries of the trust enables the trust to relieve a much greater percentage of the chargeable gain and, in this instance, all that remains is then mitigated by letting relief.
If the trust excludes you, then the amount settled by you will drop out of your estate for Inheritance Tax (IHT) purposes after seven years. However, if IHT planning is not an objective of this arrangement, then all the family, including yourself, can be beneficiaries of the trust without losing the CGT advantages and everyone can benefit under the terms of the trust when it comes to dividing up the proceeds.
Another issue is what happens to the property if it's not sold. Your first child may have married, and even entered into a divorce. If the capital is advanced when the proceeds are realised, then on divorce, half of the capital would be lost. If instead, the trustees loan the capital to "child one", then on the dissolution of the marriage the capital can be recovered (as it is a debt to the trust) and, at a later date, the capital can be advanced directly to "child one".
