Many parents seeing their children struggle to buy a house - either through lack of capital for a deposit, or the inability to meet monthly mortgage payments - will want to help. There are many ways in which to offer help, but an equal number of pitfalls, whether legal, financial or relating to tax.
Options for help
Some parents may be able to fund the outright purchase of a property for their child, and this gives rise to the fewest ongoing problems. Provided the person making the gift (the ‘donor’) lives for 7 years following the date of the purchase, then the gift is exempt from inheritance tax (IHT), and may even reduce the remaining estate below the tax threshold. Since the property will be in the child’s name it will count as their main residence for Capital Gains Tax (CGT) purposes.
Providing a deposit
Parents who cannot afford, or do not want, to fund the whole purchase of a property, may choose to help by giving money for a deposit. But be aware that giving away any sum can have potential IHT consequences, unless the donor survives for 7 years. Parents may however be able to take advantage of the annual exemption for gifts. Any unused exemption can be carried forward to the next year, so parents who have not made gifts in the current or previous years, can give a gift to a child for a deposit without IHT consequences equivalent to twice the annual exemption if unused.
Help with mortgage payments
Parents who do not have substantial capital sums to give away, may have some surplus income which they would be willing to give to a child to help with mortgage payments. Another IHT exemption may help with such contributions. An individual can achieve 100% IHT relief where they can show that they are making regular gifts of income which are in excess of their day to day needs. There are technical requirements to be satisfied to claim this exemption and professional advice should be sought before relying on this. The payments may also fall within the £3000 annual exemption mentioned above.
Acting as a guarantor
Acting as a guarantor on a child's mortgage may enable a larger sum to be borrowed as your income will be taken into account as well as the child's. This is however a risky option as you are putting your own assets at risk in the event that the mortgage payments cannot be met. There may also be adverse tax consequences.
Joint purchase of a property
Sometimes properties are purchased in the joint names of the parents and a child, either in the hope that this will give more protection for the parents' money, or with a view to joint occupation of the property. These arrangements need to be property documented to record the contributions of the parties and their intentions in relation to the money. This will provide parents with protection in the event of the child experiencing relationship breakdown or financial difficulty. There can be tax problems with such arrangements, particularly in relation to CGT, and professional advice should be taken.
There are a number of other options for helping with the purchase of a home, and the choice of which is the most appropriate will depend on a number of factors, including the ages and family circumstances of the parties, the amount of spare income and capital, and the parties' eventual intentions about where they should live. Some parents may, for example, want to raise money against their own property by way of equity release, believing it is better for their children to have the money now, than on death. Others may have property that they are prepared to transfer but would like it placed in trust so that future generations can benefit too. It is important that professional advice is taken before entering into any such arrangement.
Some words of warning...
People's financial circumstances change - even yours. Before making any gift, or entering into any kind of financial commitment, consider whether you can still afford it, even if your own financial circumstances changed in the worst way you can imagine
A "gift"; is a gift - once money is handed over, it is legally the possession of the person to whom it is given (the donee), and cannot be reclaimed, however strong the moral case. For example, if the donee dies, the money, or the asset purchased with it, will form part of their estate and will go to the beneficiaries under their will, or (if there is no will) to those who inherit on intestacy
It therefore follows that any spouse (or possibly a cohabitant) may have a claim on this asset if the relationship ends. A pre-nuptial (or pre-cohabitation) contract may offer some protection, but has no binding legal status in English law.
If the child is obtaining a mortgage to fund part of the purchase price, the lender will want to know where the balance of the funds are coming from. If parents are making this contribution, this will have to be disclosed to the lender. The lender is likely to want evidence that the parents do not require the return of the funds and the parents will probably need separate legal representation.
Parents may want to help a child on to the housing ladder but do not want to make an outright gift of funds. If money is only being loaned to the child, the parents will require a legal charge over the property being purchased but beware - many institutional lenders will not lend to the child in these circumstances.
How we can help
It is not possible in a newssheet of this length to cover all the options for funding a property, which may include private mortgages, the use of trusts, equity release, or the transfer of the family home. However, our experienced advisers can advise on all aspects of property transactions to find the solution which best suits you and your family and which is most effective from a tax planning perspective.
For information of users: This material is published for the information of clients. It provides only an overview of the regulations in force at the date of publication, and no action should be taken without consulting the detailed legislation or seeking professional advice. Therefore no responsibility for loss occasioned by any person acting or refraining from action as a result of the material can be accepted by the authors or the firm.