Franklin D Roosevelt once said: “Real estate cannot be lost or stolen, nor can it be carried away. Purchased with common sense, paid for in full, and managed with reasonable care, it is about the safest investment in the World”.
You may be aware there is a loophole in existence which is a legitimate way to buy a second property and subsequently dispose of it, without being liable for the payment of capital gains tax (CGT) – thus leaving a person’s full CGT exemption on their first home unaffected. Sound too good to be true?
With rising property prices, many young adults are now struggling to raise a sizeable deposit to purchase their first home. This method of property buying means parents can help their children avoid costly renting and effectively climb onto the property ladder. Does this sound like a good way for your clients to invest their money? Do you advocate the use of such trusts for the avoidance of tax in this way?
In terms of owning a second property, which has the potential to improve finances for the future if your clients’ affairs are handled appropriately, could this benefit your clients financially in the long run?
There could however be drawbacks attached to this, such as not being able to sell the property in the future or the market declining and values decreasing. There could be other matters that arise too, such as your clients’ children or other occupiers losing their jobs and not being able to pay rent due.
As a professional, would you advise your clients to capitalise on this as an effective way to avoid CGT liability? You may even have been asked to prepare such trusts recently.
The Adams Smith Institute stated that recent changes in UK capital gains tax rates, which saw the CGT rate on business assets increased from 10% to 18% and the rate on non-business assets reduced to 18%, are too recent to be able to draw any revenue conclusions. However, the earlier reduction in CGT on business assets to a rate of 10% for assets held over 2 years, does seem to have had a very positive revenue effect.
Below are some Government figures regarding UK CGT which show increases over time:
Mention CGT to Joe Public and it immediately provokes debate, as many confuse the matter with tax evasion as opposed to tax avoidance. People buying second homes are said to contribute more to the economy in terms of income tax, VAT, stamp duty and possibly inheritance tax. Do you agree?
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