Home Front logoQ. I’ve heard that if I buy a second home and let my children live there rent free I can avoid CGT (Capital Gains Tax) is this true?

A. Indeed you have heard right, this little-known loophole remains an entirely legitimate way to buy another property and dispose of it without having to pay any CGT and your full CGT exemption on your own home remains unaffected. It involves the use of a trust. The trust can also be used where you have owned the property for some time. The best way to do this is to set up a formal written trust, before you buy the property, with one or both parents named as the trustees. Speak to your solicitor as they can help you to set this up. You would then purchase the property via the trust by loaning the trust the deposit and the trust would take out the mortgage. You would of course need to personally guarantee the mortgage because banks are reluctant to lend to trustees. A “life interest trust” allows you to name a single child as a beneficiary, and that child also has a right to the income from the property. A “discretionary trust” allows you to name any number of children as beneficiaries. With a discretionary trust there is no automatic right to the income but you can build this in if you choose. With both types of trust, the named beneficiaries can become what are called life tenants, which gives them the right to live in the property rent-free. A discretionary trust is a more flexible choice because one child could occupy the property for a few years, then another sibling could take over the property at a later date. This is a great option as there is no limit to the number of times the occupier can change, as long as they have the right to occupy the property rent-free under the terms of the trust. By naming your children as beneficiaries they effectively activate their own principle private residence relief when they move into the property. This is the relief that exempts a homeowner’s main property from CGT. When you come to sell the property as trustees, you can claim the exemption for the whole period of ownership as long as it has been occupied by at least one of the named beneficiaries at all times. Your own principle private residence relief on your home is not affected and there is no limit to the amount of gains you can take tax-free through this arrangement. There is also no income tax due on the sale. Great news if you are cash heavy as this could be one of the most tax effective ways of investing your money and helping your children at the same time.