For many buying property for the first time are increasingly relying on ‘The Bank of Mum & Dad’. Sara Abou-Jaoude, associate at Barlow Robbins explains more.
Getting on the property ladder is still very much ingrained in UK culture as a life goal, and thirty years ago purchasing your first house was something to be achieved in your mid-twenties. Times have certainly changed. If you are 25 and spend your weekends browsing estate agent’s windows or on property websites, your friends and family are likely to think that you have come into sudden riches.
It is perhaps more difficult than ever to get a foot on the property ladder with soaring house prices and rents, increased student debts and living costs all coupled with most mortgage lenders insisting on a 25% deposit. It is not surprising therefore that many parents, if circumstances allow, feel compelled to provide financial assistance to enable their children to purchase their first home, even if on occasion that might mean them downsizing in order to release the cash.
With research showing that the average first-time buyer is 36, parents must consider that their child will likely have a partner and children to also factor into the equation. Alternatively, it is not uncommon that first-time buyers will be pooling their resources and purchasing together with a friend or colleague. No matter the relationship your child may have with their co-owner – be that friend, partner or spouse – it is important to consider that this co-owner may also be financially assisted by their parents and it is important to “separate” each contribution.
The Law Society warns that the majority of people do not think through the consequences of providing this type of financial support, and it is vital that this act of generosity is well-advised and does not result in financial hardship or anxiety. So, as a parent, what are your options?
One of the most common ways is through an outright gift. This must be reported to any mortgage lender as some may require confirmation that you are solvent and will not be acquiring any rights or interests over the property. More cautious mortgage lenders may also insist upon a Deed of Gift indemnity policy being taken out to protect the lender against the possibility that you are declared bankrupt and the creditors claim a share of the property. It is also important to consider that if you were to die within seven years of gifting the money, Inheritance Tax could be payable.
Many parents treat the monies as a loan. Here it is vital to establish the terms of the loan in a formal legal document so as to prevent confusion and distress if circumstances change. It is important to dispel the myth that this would be a complicated legal document – it should be a simple statement of facts: on what basis the loan was made, what will happen to the money if one of the parties dies or if you request the money back. This might be of particular importance if your child is purchasing together with a partner and their contributions are unequal. Should you wish to charge interest on the loan, there will be income tax and possibly consumer credit implications. The existence of the loan can be registered against the title which prevents any dealings of the property without your involvement.
A declaration of trust
The term “loan” does not always sit comfortably with some parents who do not wish to feel that they are burdening their child with further debt, however the “no strings attached” nature of a gift may create some unease. You may wish to ensure that your investment will always be for the benefit of your child, and by entering into a Declaration of Trust you can ensure that your child’s co-owner has no future claim on the money. The Deed would specify how the monies are to be dealt with once the property is sold and would prove useful in the event of a dispute. It can be further reinforced by placing a restriction on the title which, as with a loan, will prevent any dealings of the property without your consent.
Buying a house for your child
Whether you are downsizing significantly to enable you to purchase two properties with the proceeds of your sale, or whether you already own sufficient land in your back garden to accommodate another house, some parents look to own another property so their children can live there. Living in close proximity to your family certainly has advantages from a childcare perspective; but there are other implications you will need to consider such as Capital Gains Tax liability or whether or not to charge your child rent, which would be treated as income when calculating Inheritance Tax.
Whichever option you to choose, it is imperative to seek both legal and financial advice first to make sure you make an informed decision.
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