In 2020 the Bank of Mum and Dad supported more than half of first-time buyers under the age of 35 to buy their first home.
As the cost of borrowing remains low with mortgage rates at an all time low many parents are providing on average £20,000 to help their children get on the property ladder.
If you are thinking of helping a family member buy their first home Private Client Solicitor Hannah Welbourn discusses the steps you need to take.
Initially and importantly, you need to ensure that you are comfortable with the investment and that you can afford to provide this level of financial support to your children. This is important because once invested in a property you will not be able to access the funds and so you need to be able to live or fund retirement without these funds.
If you are happy with the investment, then there are three ways parents can provide their children with funds to help them buy a house:
You can give away up to £3,000 each per year tax-free (£6,000 if you haven’t made any gifts in the previous tax year). You can also make a tax-free gift to a child of up to £5,000 in the year in which they get married.
The principal tax to consider when making gifts is inheritance tax (IHT) so with larger gifts these will be ‘potentially exempt transfers’ if you survive the gift for seven years, it will not be liable for IHT this is commonly referred to as the ‘seven-year rule’.
However, if you were to die within the seven years, the gift will be taxable at 40% (with the potential tax liability tapering down after three years).
Any substantial gifts should be formally documented in a letter or deed of gift so that there is a record for future reference or in case the mortgage company requires evidence of the gift. If your child is purchasing the property with a partner, they should also consider putting a cohabitation agreement and/or a declaration of trust in place as this will help to determine how the property should be divided if the relationship ends.
A trust adds a level of security and will be beneficial, if you have any concerns about how your children might manage the money if it is not immediately invested in a house.
As trustees, you can continue to control the funds until such time as your children are ready to purchase a property.
Provided you do not put any more than your tax-free allowance for IHT, or ‘nil rate band’ (currently £325,000 each) into trust, there will be no immediate IHT implications of doing so and you will start the seven-year clock running to remove the funds from your estates.
The taxation of trusts is a complex area and therefore we would always suggest you take legal advice before going down this route as there will be administration and set up costs to consider.
A loan will not reduce your IHT bill (as the loan will be an asset in your estates) it does offer a little more control than an outright gift and so could be a good alternative. You should be aware that a loaned deposit may restrict the availability of certain mortgages.
If you later choose to write off your loan, any outstanding balance will at that point be treated as a gift and will be subject to the seven-year rule for IHT. As with gifts, any loans should be formally documented.
Other ways to help
Specialised mortgage products
Family Offset mortgages reduce the interest payments and therefore make the mortgage more affordable by using parental savings to offset your child’s mortgage debt. By doing this you will lose access to your savings and will not earn interest while the mortgage arrangement is in place.
Another option is a Guarantor mortgage. This allows parents to offer their own savings or home as security for their child’s mortgage payments but the risk here is that savings, or the home could be lost if the mortgage payments are not made.
Buy jointly with your child
You could take out a joint mortgage and buy with your child so that your combined incomes enable them to access a larger loan. Here you will be equally liable for the repayments and if you are named as a purchaser and already own a property, you and your children will almost certainly pay an additional 3% in stamp duty.
You may also be liable for capital gains tax on your share when the property is sold.
If you are a parent wanting to help your children buy their first home, please contact Hannah on 01225 750000 or email@example.com We can take you through the options and discuss the tax implications for you to make sure that you can make this generous offer having been fully informed.
For more information on the specialist mortgages available or to help you buy your home please contact Residential Property Partner Alison Treble on 01225 750000 or email firstname.lastname@example.org. We are here to help.