With one in four transactions in the UK dependent on the Bank of Mum and Dad, our Wills, Family and Residential teams got together to cover the main points that parents should watch out for should they be considering helping their loved ones out financially.
According to Legal and General’s recently published report in 2018 the Bank of Mum and Dad will help 316,000 loved ones buy a home, an increase of 17,700 from 2017.
One in four transactions in the UK are dependent on the Bank of Mum and Dad. The value of bank of Mum and Dad supported property purchases in 2018 will rise to £81 billion. A staggering 20% of homeowners aged 44-55 are assisted by their parents and nearly half of the over 55’s are open to the idea of equity release for a loved one’s home deposit.
Many of such generous parents and grandparents are providing this support without taking legal and financial advice oblivious to the potential tax consequences, options for financing their contribution or the longer term implications if their child subsequently separates.
I want to help my child purchase a house. Should I gift or loan the money to them?
If you gift cash or other assets to a person other than your spouse then this can have inheritance tax implications. If you die within seven years of making the gift (known as a potentially exempt transfer), then its value will fall back into your estate for calculating your inheritance tax liability. Everyone has a total annual exemption of £3,000 which means gifts of this value can be made each year without any inheritance tax implications.
If you lend money to someone, the amount loaned continues to form part of your estate for inheritance tax purposes. This arrangement should be properly documented to make sure that your Executors can deal with the loan in the event of your death.
If you don’t want to make an outright gift to your child but are happy to loan the money to them you should consider formalising the loan to ensure that there is no misunderstanding further down the line. This may be especially important if you have other children.
An Agreement can be drawn up to record the personal obligation to repay the loan, this can include details as to when the loan becomes repayable- is it to be at a future date like the sale of the house, alternatively are payments to be made monthly, is interest to be payable?
If you want to secure your loan then in addition to having such an agreement drawn up it can be registered against the property as a Standard Security. This would rank below any other mortgage on the property and your child would need the mortgage lenders consent to you also having a secured charge on the property.
I can afford to buy the property, should I buy it in my name and let them live there?
If you decide to buy the property in your name it will form part of your estate. You may then be liable for capital gains tax when the property is sold which would be calculated based on the increase in value between the date of purchase and the date of disposal in the future.
If you are already a homeowner then be aware that when buying an additional property you will have to pay an Additional Dwelling Supplement (ADR) of 3% of the purchase price, this is in addition to any Land and Buildings Transaction Tax (LBTT) payable.
If you are going to buy the property with the assistance of a mortgage check with your lender if they will allow your children to live there. They are likely to only offer you a buy to let mortgage and it is likely that the condition of this will be that the property must be let to paying tenants and not family members.
Bear in mind also what would happen if your own financial circumstances changed and you needed to then sell the house or re-mortgage it; your children would be occupying the property and you would need their consent and cooperation in vacating the property.
I have seen adverts on TV re equity release, is that the best option for me?
Specialist financial advice should always be undertaken prior to considering equity release as a possible option. There may be other alternatives available via existing investments, pensions or savings so a full discussion with a trusted financial will ensure that you make sound, informed decisions, specific to your own personal circumstances, objectives and timeframes.
What happens if my child’s marriage or relationship breaks down? I don’t want their ex-partner to benefit from my support.
We often come across cases where a parent provides financial support to a child in this way. If the contribution is to be made as a loan and that is properly recorded by a security and/or in a properly drawn up Agreement then you will be able to evidence the loan and seek its repayment.
If you have gifted the money then things get a bit more complicated. You could make it clear and record in writing that the gift is to your child only and not their spouse or partner. However, this won’t guarantee that if their relationship ends your child will be entitled to or recover the equivalent amount as part of their financial settlement.
The way to protect and ring-fence your contribution is for your child and spouse/partner to enter into a legally binding agreement. If they are living together this is known as a cohabitation agreement. If they are about to marry it is known as a pre-nuptial agreement. If they are already married it is known as a post-nuptial agreement.
The agreement can formally record the gift to your child and what will happen in the event of their separation or divorce. It can ring-fence the gift even if they subsequently sell the property and purchase another property or make an investment with the proceeds.
If you are considering helping your child get onto or move up the property ladder and would like advice on the tax, property or family implications of doing so please contact the BTO Personal Team.