This note is intended to cover some of the main issues for parents to consider when deciding whether to buy a UK property in their names, or in the name of their child. We touch on some of the main issues below.
Succession to the UK property (ie the rights and processes involved in inheritance) is a factor that should be considered when making any major purchase. Succession laws are different in every country (and can also differ between states and internal regions) and are, therefore, a particularly important consideration for people with assets in different countries. The Financial Times reported recently that the number of residential homes in England and Wales owned by overseas buyers has tripled in the last decade. So, this is a live issue for an increasing number of purchasers.
How does succession work in England & Wales?
The hallmark of English succession law is ‘testamentary freedom’ – the principle that a person can leave their assets to whomever they wish by Will. This contrasts with the systems in many countries and states, particularly in Europe, where succession may be governed by ‘forced heirship rules’ requiring inheritance by close family members in varying degrees.
However English law does allow certain persons to be able to claim for financial provision out of a person’s estate in certain circumstances, but such claims are at the court’s discretion and are not guaranteed to succeed. In the event that a person dies without leaving a Will which applies to their English estate, English law (called the ‘intestacy rules’) set out a hierarchy of relatives who will inherit the English assets.
Why is this important to the non-resident property purchaser?
The succession of land and property is, generally, governed by the country in which it is situated. So, anyone who owns land or property in England should make a Will in England to ensure that the property will be inherited by the persons they desire. If the person who is buying an English property lives in France, they should instruct an English solicitor to help them prepare an English Will specifically to deal with the English property.
Purchasing in the names of adult children
One option for managing the succession to the English property might be to purchase the property in the names of the purchaser’s children. It should be noted that in England & Wales, land and property cannot be owned by children under the age of 18, so this option is only available to prospective purchasers with adult children.
What are the advantages and disadvantages of doing this?
If the parents intend that their children will ultimately inherit the UK property anyway, they may consider it easiest for the children to receive the property at the point of purchase so that the children are saved the expense and delay of dealing with the cross border probate complications that can arise when the parents die abroad with assets in the UK. If the children live in England, it may simplify the succession matters if the property is in their names. However, that would mean that the children would then need to consider succession to the property as part of their own estates. In particular, they will need to consider what rights (if any) the purchasing parents are to have in the property.
Inheritance Tax (‘IHT’)
Whenever we think about succession, we must consider IHT. In the UK, IHT applies to transfers of value from one person to another in lifetime or on death. For those who reside abroad but have assets in the UK, IHT may be charged on those UK assets if they are valued in excess of the IHT threshold (currently £325,000).
So if a non-UK resident and non-UK domiciled person (who we shall call Camille) buys a UK property in her name, it may later be exposed to UK IHT on her death if it anyone other than her spouse inherits the property, depending on the value of the property. If, say, her son (who we shall call Max) inherits the property and its value is in excess of £325,000 then it is likely that IHT would be charged on the property.
Also, if Camille buys the UK property in her name and she later decides to give it away to Max, IHT could again be charged on the property if Camille were to die within 7 years of making the gift. There may be IHT to pay even if Camille dies more than 7 years after the gift if the gift was “a gift with reservation of benefit”. The IHT reservation of benefit rules are complex rules that come into play if Camille continues to enjoy significant benefit from the property after the gift (eg by using/staying at the property or receiving rental income from the property). If these rules were to apply to Camille’s gift it would mean that the gift would be ignored for IHT purposes and so Camille would still be treated as owning the property, and as a result there may be IHT to pay on the property on her death.
If Camille is not confident that she will live for another 7 years, it may be better from an IHT perspective to buy the UK property in Max’s name, using cash from a non-UK source. That would prevent IHT being charged on the UK property if Camille were to die within 7 years of the gift. However that would be on the basis that Camille would not enjoy significant use or benefit from the property after the gift, otherwise that may trigger the IHT reservation of benefit rules (although Camille could stay with Max at the property for up to one month each year without triggering the rules).
This is a complicated area of UK tax and if Camille intends to stay at the property for longer than one month a year, or to receive rent from it at any point in the future, she should seek UK tax advice before making the gift to Max, whether the gift is of the property or the purchase cash.
Capital Gains Tax (‘CGT’)
In recent years, the taxation of income and gains derived from UK property has started to receive increased attention from UK policymakers. That attention has been particularly focussed on taxation of non-resident property owners. As such, when thinking about succession, CGT must be considered.
A non-resident UK property owner is subject to CGT on the disposal of UK residential property. Importantly, giving away a UK property, eg to children, would be a disposal for CGT purposes. So, if Camille purchases a UK residential property in her own name and later decides to gift the property to Max, she will face a CGT bill on the increase in value between the date she purchased the property and the date of the gift. However, if she purchases a UK property in Max’s name, and Max then lives in the property as his only or main home, when Max later sells the property it will normally be exempt from UK CGT.
Exposure to Life Events
Whilst taxation is an important element of succession planning in any country, it is important that families do not overlook other risks. The most significant risk in giving away any asset to children during one’s lifetime is simply that the asset is then owned by those children. As a result, the asset is exposed to potential adverse life events that the child, being earlier in their life, may be more at risk of being impacted by. Let’s consider Camille and Max. If Camille purchases a property in Max’s name, the property is legally Max’s. If Max should die, the property will be inherited in accordance with his Will, or the English intestacy rules if Max does not leave a Will. Also, if Max were to be declared bankrupt, the property could be sold by the Trustee in Bankruptcy and the proceeds used to pay Max’s creditors. Perhaps most importantly, for many parents, if Max were to get divorced part of the value of the house may end up going to the ex-spouse under the terms of the divorce settlement.
Max could sign a ‘declaration of trust’ by which he declares that he holds the property legally, but the beneficial interest (the underlying value) belongs to Camille. Whilst this may avoid the bankruptcy and divorce risks referred to above , it would mean that the value of the property would still be exposed to IHT on Camille’s death, and any income or gains later derived from the property would be taxable on her.
To summarise, where non-UK resident individuals are considering purchasing a UK property, they will want to weigh up the following advantages and disadvantages of purchasing the property in the names of the children:
- Succession is effectively removed as a consideration for the parent, and may be simplified.
- Potentially favourable Inheritance Tax treatment, relative to UK residents for elderly parents.
- It simplifies matters from a Capital Gains Tax perspective for the parent.
- The property will belong to the children and will, therefore, be exposed to potential negative life events.
- The parents will not be able to receive any significant use or benefit from the property without creating adverse UK tax implications.
When considering their options, parents should make sure that they take full advice from accountants and/or lawyers and, just as crucially, should ensure that they discuss these matters with their families to ensure that their long-term objectives are reached in the best way possible.
Mr Robin Lecoutre
Browne Jacobson LLP (www.brownejacobson.com/sectors-and-services/services/international/groupe-francais)
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