jimmbo

Hi all,
Does anyone know of what problems we would encounter if we bought a house in the kids names,which we would then live in?

J.

EsuriJohn

Common thing to do in Spain but it has pitfalls which can be wicked! But we have done just that.

brodev

your kid gets married, divorced and ex claims half of "your" house

pwwm

This was why we did not do it, like to know I shall keep my house

scampicat

Are there any advantages to doing this?

EsuriJohn

Yes it is all to do with Inheritance Tax.

teddy14

inheritance tax and Capital gains Tax avoidance.

It can cause tax problems for your kids if they own another property besides "yours".

I would reccoment a pre nup if your child is married (although they often dont stand up in court), and get some sound advice from a spanish / english acocuntant

scampicat

How does it avoid CGT? Presumably if it was sold your kids would be liable for it instead of you?

Fred James

Yes they would be liable and for a higher amount as they would presumably not be residents and therefor not get the tax breaks.

Arco-Iris

Isn't there something called an Usufruct, whereby you transfer the title of the property to your chosen heir while you are still alive, which gives you the right to use it for as long as you live. This is probably the way to avoid Inheritance Tax, but not Capital Gains Tax if your heir(s) choose to sell it after your death.

jimmbo

Hi John & Kath,
Can you fill me in with the wicked details?
Cheers.

Fred James

Yes, a Usufruct is a good way of avoiding IHT especially when you buy a house and buy it in the children's name and retain a Usufruct.

However trying to do this with an existing property is more difficult.

First if you transfer a property to the children it will attract the 6% tax that a normal sale would do. Secondly a transfer of an asset is a gift under Spanish law and is taxed immediately at the same rate as it would be if it was an inheritance.

I think that the value of the gift would be reduced as the Usufruct would reduce it's value in the short term but it is still a gift and is taxable. There may also be different rules depending on the residency status of the children

This really is an area where professional advice is essential.

EsuriJohn

Hi jimmbo,

We took advice before we started the buying process and of the options decided on "family ownership". We discarded owning it through our UK limited company because of "benefit in kind tax" (the HMRC has now dropped this), we discarded owning through a Spanish company, high set up costs (Hacienda now introduced benefit in kind tax).

Family ownership has pit falls around the children getting stroppy, divorced or going bankrupt. We weighed these and decided that this was the route for us. There are five of us and each own 20% as recorded on the nota simple.

If the Villa was worth €500,000 this means that for IHT each share is worth €100,000. My wife and I are in Andalucia as tax residents, so as we toss off this mortal coil our individual shares are below the value of Spanish IHT. In addition we intend to have a mortgage on the property to further reduce the value for IHT purpose in Spain and UK. We own our UK property as tenants in common (not as relevant as it used to be) and we are UK domiciled so our 1/5 share less the mortgage and our half share of the UK property do not take us into the UK IHT band.

If we have any spare capital at the end of the build and having taken the mortgage this should be placed in Trust in Gibraltar to avoid Spanish wealth tax.


As a last planning tool we have made individual Spanish wills leaving our share to the three children in equal parts with a usufruct for the spouse. This has the added benefit of further reducing the value (in Spain the Hacienda has a table of reductions based on age of the survivor at first death). It will have a similar effect for UK IHT but it is not so formalised and a judgement will have to be made of the value of a 1/5 share of the villa with a lifetime tenant.

Regards,

John.

Fred James

John, that just enforces the point I made on another similar thread that forward planning is essential.

It's nice to see that someone has done their homework for a change!