By Emma Beynon
Tax Consultant, Kreston Reeves
Investing in a property to provide a relative or loved one with somewhere to live can be rewarding in a variety of ways, from the potential to benefit from substantial capital growth to the ability to help somebody you care about.
Where landlords have family members who wish to go to university, it often makes sense to purchase a house of multiple occupancy (HMO) – and when doing so, it can be advantageous to do so in a trust.
By purchasing a rental property in a trust for the benefit of your family members you can let the property to others, which would generate an income for them to use for university expenses. Alternatively, the property could be used by them whilst attending further education. A combination of the two may also be possible depending on how large the property is and where it is located, with your family member living there and you also renting out the spare rooms to other students.
Where a beneficiary of a trust lives in a property that it owns, it is possible to claim Principle Private Residence Relief on the sale of the property as if the property was owned by the individual themselves. This potentially means little or no Capital Gains Tax would be payable if it were sold for a profit. This could be particularly valuable relief if one family member initially lived there and then you wished to sell the property to buy one in another location to help a second individual. Any increased value of the property could also fall outside of your estate, helping with Inheritance Tax planning for the family.
These principles don’t have to apply to just properties in student towns, nor for raising funds for further education. In addition, the family members that can benefit from a trust can be far reaching and so the structure doesn’t just have to be with one child or grandchild in mind. This type of arrangement can therefore benefit many generations.
The use of a trust does have its own tax issues to consider. It is therefore important to fully understand how this structure works and the tax benefits and costs before entering into any agreement.