How to keep gifts of money in the family
My wife and I are in our 60s and hope to give reasonably substantial sums (up to £40,000) to each of our two children to help them with house purchases. One is married and the other lives with a partner. Both have children. How can we ensure that the sums would remain with our children in the event of relationship breakdown? Are there ways we could reduce the amount of possible inheritance tax liability in the event that either or both of us should die within the next seven years?
Toby Harris runs his own tax consultancy and is a member of the Society of Trust and Estate Practitioners. He says you are getting into a complex area – especially if a child’s relationship breaks up: “If a gift is being made now, rather than by a will, a trust may be the right way.
“This is where tax, trusts and matrimonial law meet. It’s a tricky area where you need an adviser with all-round skills.” Visit www.step.org or call 0207 838 4885).
He suggests a carefully-set up trust would sort out all the tax and ownership issues: “You could settle the money on the grandchildren, and authorise the trustees (your child might be one, but maybe not the only one) to invest in a residence for them (and by implication their parents). By giving the grandchildren the right to ‘income’ – here being the right to live in the purchased property – the trustees should get ‘main residence’ relief. So if the family does break up and everything is sold, at least the funds will not suffer CGT and the money will stay in the family.
“This structure is in common use and ought not to cost much to set up. There will probably be no income and no chargeable gains. The existence of the trust should be notified to HM Revenue & Customs on form 41G (trust) which is widely available, but apart from that there would be no need for tax returns by the trustees except when a major event triggered a tax liability.”
Harris adds: “Don’t delay making a gift for fear it may not work. The relief on lifetime gifts is simple and valuable, and helping your family with house purchases may be the best thing you ever do for them.”
Is there such a thing as a green Child Trust Fund?
I want to invest my son’s Child Trust Fund (CTF) voucher in a scheme that is 100 per cent ethical and only invests in companies that are green-thinking and organised on sustainable principles. Does such a fund exist?
Your first stop should be the UK Social Investment Forum (UKSIF). This is a very useful online resource for investors with an interest in ethical and SRI (socially responsible investment) issues.
The site carries a table of available ethical CTF funds. The list includes direct investment in a tracker fund (FTSE4Good index) via the Children’s Mutual, and the same company also offers access to two Insight investments ethical funds, including the Evergreen fund which might fit your requirements.
Otherwise you could choose a self-select CTF run by an execution-only stockbroker and opt for your own choice of ethical fund. Squaregain and The Share Centre offer a choice of ethically-screened funds. UKSIF’s consumer website, www.investability.org has all the details and links you need to investigate the various options.
If you want to take independent financial advice before making your investment decision, UKSIF’s Investability site carries details of financial advisers who specialise in ethical and SRI issues.
Tax implications of
owning parents’ house
My wife and I bought her parents’ council house for them in 1996. The house was registered in their names until 2000 when we had it registered to our names. We have paid for the house and all the legal fees. Our agreement is that my in-laws live in the house rent-free (they pay for maintenance on the property) for the rest of their lives. Then the house will pass on to us. As we have paid for the house out of our money, do we become liable for this new penalty income tax – linked to the pre-owned assets tax – which I understand might be payable while my in-laws are still living in the house?
Many people are worried about the new pre-owned assets tax (POAT), introduced last April. Most people now seem aware that passing ownership of a house between generations of a family, in a bid to escape inheritance tax, could potentially land them with an annual income tax bill. It’s one of the most pressing topics in the FT postbag.
The good news is that you are not caught under these regulations. That’s because the house hasn’t left your parents’ estate for IHT purposes. Sheena Hay, senior tax manager at Grant Thornton, says: “Because your in-laws continue living in the house, rent-free, it will be treated as remaining in their estate under the Reservation of Benefit rules. Unless their total estate, including the house, is more than £275,000 each (2005/6), this should not create a problem for IHT. It also has the advantage that they will not be caught for income tax under the pre-owned assets rules.”
Hay suggests the main disadvantage of your arrangements is that any sale of the property might leave you liable for capital gains tax (CGT). She suggests: “If you and your wife had acquired the property as trustees of a trust under which your parents-in-law still lived in the property, then you would be able to avoid this CGT and still benefit from the proceeds.
“It might still be possible to do this if the house has not risen too much in value since 2000.” Get professional tax and trust advice if this course of action interests you.