Expert guidance on taxing issues

Derek Mitchell, Director at AAB, answers some tricky taxation questions … Q: My eldest son is about to go to university and I want to buy a flat for him, what is the most tax efficient way to do this?…

Blog14th Jan 2015

By Sarah Munro

Derek Mitchell, Director at AAB, answers some tricky taxation questions …

Q: My eldest son is about to go to university and I want to buy a flat for him, what is the most tax efficient way to do this?

A: There are options open to you when considering providing a flat for your son. You could buy and retain the flat in your own name; buy a flat which you then transfer into his name in the future, or you could give him the cash to buy a flat himself.

Another, often more tax efficient option is to set up a trust. A trust is administered by trustees and can be used to hold assets for the benefit of a defined group of beneficiaries. This can allow you, in your capacity as trustee, to hold and manage a student flat for the benefit of your son (and other children, if relevant). The property would be owned by the trust, which would be funded by a transfer from you called a “settlement”. Settlements fall outwith your estate for Inheritance Tax (“IHT”) purposes after seven years, making this an “IHT friendly” way to hold assets for the benefit of your children’s future.

From a Capital Gains Tax (“CGT”) perspective, if you buy the property personally, on either a future sale or gift of the flat you will be liable to pay CGT at either 18% or 28% on the increase in value since acquisition. However, it is possible for a trust which owns residential property occupied by a beneficiary to claim Principal Private Residence (“PPR”) Relief to reduce the CGT payable when the property is sold.

If part of the flat is rented out, the rent received can be taxed on your son at his marginal rate of tax. He may pay little or no income tax whilst at university, which compares favourably with you owning the flat personally, as you may be liable to income tax at a much higher rate.

It is possible of course to make a simple outright gift to allow your son to buy the property, however you may feel that it is premature. The real benefit of a trust, in addition to the tax efficiencies, is that it allows you to retain control over the property whilst your children are still relatively young, and the flexibility to delay major decisions such as the value and timing of substantial gifts until further into the future.

Q: I have heard that you can get relief from Inheritance Tax on gifts to charity. How does this work?

A: Since April 2012 it has been possible to reduce Inheritance Tax from 40% to 36%. This is done by leaving at least 10% of your net estate to a qualifying charity in your will. The calculations required to determine what 10% of your net estate actually equates to can be complex. To take advantage of this relief you should make a will which is written in such a way as to make provision for a gift to charity, the value of which equals at least 10% of the value of your net estate on death. The wording of your will is important and I would recommend you seek professional advice from a suitably qualified tax advisor or solicitor when drafting your wills.

If you are already planning on leaving a significant legacy to charity in your Will this should mean that more goes to your chosen beneficiaries and charity, and less to the tax man. However, although this is a valuable relief, this should not necessarily deter you from making gifts to charity during lifetime (provided you can afford to do so). This is because gifts made during lifetime may qualify for income tax relief under the Gift Aid scheme as well as falling outside of your estate for IHT, and these reliefs combined may outweigh the 4% IHT reduction.

Q: I am in the process of selling my current home and purchasing another and had budgeted to pay Stamp Duty Land Tax on my new home at the rate of 4%. However, I understand there has been a change to rules and I wanted to know whether these rates would apply to me and what the impact would be in terms of cost.

A: Under the old rules, you would have paid Stamp Duty Land Tax (“SDLT”) at a single fixed rate of between 0% and 7% of the property price, with the higher rates applying to the more valuable properties. Under the new rules, different rates of tax will be charged on set bands of value, to give a more progressive tax – similar to how Income Tax is calculated. The new rules apply from 4 December and in the majority of cases the new rules will result in lower SDLT being due. The table below sets out some examples of the old rates versus new rates on different purchase prices:

Purchase Price of the Property (£) Old rates paid on the full property price (£) New rates paid on the part of the property price within each tax band (£)
250,000 2,500 2,500
350,000 10,500 7,500
500,000 15,000 15,000
750,000 30,000 27,500
1,000,000 40,000 43,750

If you are in the process of purchasing a property, your solicitor will calculate the SDLT you have to pay. However, if you wish to work out the amount you will have to pay, HM Revenue & Customs has an online calculator which allows you to do this.

From April 2015, this new SDLT regime will be replaced for properties purchased in Scotland by the Land and Buildings Transaction Tax (“LBTT”). This tax is calculated on a similar basis as the new SDLT regime i.e. on a progressive basis, but the rates are higher, and property transactions affected by this should be before completed before April 2015 where possible.

Q: I receive Child Benefit for my two children and have recently gone back to work. I have heard about the High Income Child Benefit Charge and my earnings are less than the £50,000 mentioned by HM Revenue & Customs, although my husband’s earnings are in excess of that. Does my husband have to repay any of the child benefit since it is received by me and if so should I elect to stop receiving the Child Benefit payments?

A: The High Income Child Benefit Charge (“HICBC”) was introduced from 1 January 2013 to claw back the child benefit received where at least one parent has taxable income in excess of £50,000. The rules are slightly different if parents are separated and I haven’t covered these rules here. In your case, even though you receive the child benefit, your husband will have to repay the child benefit since he is the highest earner and earning in excess of £50,000.

The HICBC has to be reported to HM Revenue & Customs (“HMRC”) via a self assessment tax return. If your husband does not normally submit a return, he will have to register with HMRC for self assessment and complete tax returns on an annual basis. For the 2013/14 tax year, the HICBC was payable on 31 January 2015. If your husband earned more than £50,000 in either of the two tax years ended 5 April 2014, he may either have to write to HMRC to amend his tax return if he submitted one, or alternatively notify HMRC that he needs to complete a tax return for these tax years.

You can submit an election to HMRC to request child benefit to be stopped. If your husband earns between £50,000 and £60,000 then only part of the child benefit will be repayable and it is probably worthwhile continuing to receive child benefit and making a partial repayment via the tax return. If your husband earns over £60,000 however, all of the child benefit will be repayable and you therefore may want to submit the election to stop the child benefit payments. This would then mean there would be no need to report this on a tax return in future tax years.

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