I own a house in London with my wife that I have lived in for over 30 years. I also own a large property and a few cottages in Wales, built by my great-grandfather, which I rent out. I have heard that tax changes are afoot that could be financially damaging. Advice would be appreciated.
David Smith, head of property litigation in the London office of law firm JMW Solicitors, says your house in London is unlikely to be subject to any additional financial burdens if it remains your main home. However, your properties in Wales are potentially subject to increased local taxes and a new regulatory regime depending on how they are rented out.
If properties in Wales are used as a second home or rented as self-catered holiday accommodation, they are likely to be subject to higher rates of local authority council tax. Welsh local authorities have long had the power to charge a 100 per cent premium on council tax for properties that are empty or only occupied occasionally.
Few local authorities charge this sum but from April 2023 the maximum premium will increase to 300 per cent. The Welsh government is also limiting access to the lower business rate of council tax for self-catered holiday lettings. For that lower rate to be available properties must from April be available to let for 252 days each year and actually let for 182 days.
For properties that are rented in the normal private market — other than lettings for holiday purposes — the Renting Homes (Wales) Act 2016 came into force from December 1 2022. This reshapes the lettings market in Wales. Tenants are called contract holders under this system and the agreement you have with them is called an occupation contract.
You must give a full written statement of the agreement, along with other information. These agreements are detailed and must contain certain information including an explanation of the Act and the contract holders’ rights and obligations.
The Welsh government has provided model forms you can use to help you. If you fail to provide the information or get it wrong, the contract holder can reclaim rent that has been paid to you. You will be obliged to keep the property in repair and ensure it is fit for human habitation and must also ensure that the property has smoke and carbon monoxide alarms, a gas safety certificate and an electrical installation condition report. If you do not have any of these then the contract holder can recover rent paid to you.
Lastly, contract holders are entitled to at least six months in the property and must then get a further six months’ notice if you want the property back unless they have failed to pay rent or broken some other term of the agreement.
If you are uncertain about your position then you should seek professional advice, especially about the Renting Homes (Wales) Act as it is quite complex and the consequences of an error can be serious.
How can I set up a fund for my disabled grandson?
My grandson is severely disabled and will need life-long care. I want to help him and his parents to provide for his care and would like to set up a fund to do that long after I am gone, but will be properly administered to make sure that the funds are well used. What is the best means of achieving this?
Patricia Milner, partner at law firm Withers, says there are useful tools to help provide long-term care for a disabled person. You could consider establishing a disabled person’s trust (DPT) for your grandson’s benefit. This is a type of trust arrangement designed specifically to create a suitable structure to hold assets for a person who qualifies as disabled when the DPT is made — even if they don’t at a later stage.
A person can qualify as the beneficiary of a DPT if one or more of the following apply if they are incapable of administering their property or managing their affairs because of a mental disorder or they are receiving certain types of state benefit or other allowances in relation to their disability.
DPTs are often drafted to give the appointed trustees complete discretion over how to manage and distribute the assets. This means that your grandson would have no right to the DPT’s capital or the income that capital produces. However, the trustees are able, at their discretion, to make capital or income available to your grandson or apply it for his benefit.
The fact that your grandson is not the owner of the assets in the DPT means that, under present rules, they would not be taken into account in any means testing for state benefits.
Your grandson will be the principal beneficiary of the trust during his lifetime, and this means that — with one very limited exception — any distributions from the DPT will need to be for him and no other family members.
This position will change when your grandson dies. The trustees can then bring the trust to an end or it can continue for other beneficiaries, although it will then lose the special tax status it had as a DPT.
Unlike almost all other modern trusts, settling assets into a DPT will not give rise to an immediate inheritance tax (IHT) charge of 20 per cent of the value settled over the nil rate band although an IHT charge may arise if a donor to the trust dies within seven years of making their gift. IHT will not be payable on every 10-year anniversary or when capital distributions are made.
As the assets of the DPT are treated for tax purposes as belonging to your grandson there could be IHT on his death, depending on the size and nature of the assets in the DPT at that time.
Generally, a DPT structure is a flexible way to hold and apply assets for the benefit of your grandson during his lifetime in a secure and tax favourable manner.
The opinions in this column are intended for general information purposes only and should not be used as a substitute for professional advice. The Financial Times Ltd and the authors are not responsible for any direct or indirect result arising from any reliance placed on replies, including any loss, and exclude liability to the full extent.
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Our next question
My husband died in 2021 and I’m still trying to sort out his financial affairs for probate. While looking through his bank statements I discovered that in 2019 he gave his two children from his previous marriage £25,000 each as a gift. It was out of his savings and didn’t impact his everyday spending. Is inheritance tax payable on this? If so, roughly how much tax will I have to pay on it?