Buying your first home has never been easy, and the increase in house prices over recent years has made the task even harder for first time buyers. As a result, prospective house buyers are turning to parents, grandparents and other relatives for help. Indeed, it is a scenario we come across regularly; and, by and large, parents are keen to give their children a helping hand to provide a deposit to enable them to buy their first home, or trade up to a larger property.
The UK’s 10th largest lender
If the Bank of Mum and Dad was a business in its own right, it would be the UK’s 10th largest lender measured by total loans issued, according to research carried out by Legal & General in 2019. This research, undertaken in conjunction with the Centre for Economics and Business Research (CEBR) also showed that 23% of all housing transactions undertaken in that year involved parental or family assistance, with 65% of buyers questioned saying that they would not be able to proceed with the purchase without the financial assistance. Legal & General’s research also showed the average gift made for this purpose was £25,800 for buyers in London.
By providing a gift by way of deposit, parents can enable their children to increase the amount they can borrow on a mortgage, helping them to buy a home which would be impossible without the financial assistance. Alternatively, the gift could mean that the child borrows less on their mortgage, leading to lower monthly repayments and potentially access to lower mortgage interest rates.
Beware the pitfalls
Despite the good intentions that parents often have to help their children, they would be well advised to consider the pitfalls before gifting funds to their children to enable them to buy a home.
Any gift – be it by way of a deposit for a house or for another purpose – could have inheritance tax consequences. Each individual can make gifts of £3,000 per tax year and therefore a married couple could gift £6,000 of capital (plus £3,000 each from the previous tax year if not used) without any inheritance tax concerns. As shown by the research above, this is less than 50% of the average financial assistance provided by parents. Any amount gifted above the gift exemption is treated as a potentially exempt transfer (PET). No inheritance tax is due immediately; however, the person making the gift needs to live seven years from the date the gift is made for the gift to fully escape inheritance tax.
If a parent makes a gift to a child who is buying with an unmarried partner, the consequences of relationship breakdown could mean that the funds are unprotected if the property is subsequently sold. It is an important scenario to consider, and this can be avoided if the solicitor dealing with the purchase prepares a suitable Declaration of Trust, which stipulates that the amount of the gift is paid back to their child from the proceeds of sale.
Be careful with co-ownership
Some parents decide that rather than making a gift of a deposit, they would prefer to buy the property with their children. Whilst this allows parents to enjoy an equity participation in the property, the tax consequences need to be considered further. Firstly, assuming the parents already own a home, the purchase would be seen as being a second home, and therefore be liable to the additional rate of stamp duty (3% of the purchase price).
Secondly, the share of the property owned by the parents would not benefit from Principal Private Residence Relief, and if a gain is made on sale of the property in the future, the proceeds on the share owned by the parents would potentially be liable to Capital Gains Tax, at a rate of 18% or 28% (depending on their overall tax position).
Lastly, if a mortgage is being arranged for the purchase, the parent would be jointly responsible to meet the mortgage payments if the child was unable to make the repayments.
Looking after your interests
Whilst there are plenty of valid reasons for the Bank of Mum and Dad to remain open for business, parents need to carefully consider their own financial needs in later life before gifting funds to help offspring onto the housing ladder. The same research undertaken by Legal & General showed that 17% of parents passing money to their children via the Bank of Mum and Dad are materially worse off financially as a result.
Giving away capital when retirement is looming can diminish the amount of savings or investments, but also reduce the level of income that could be generated by the gifted capital. The gifted funds are also no longer available to cover any unexpected expenditure, and children will often not be in a financial position to return the favour if the parents require funds.
Parents would also be well advised to consider the effect of unequal gifts made to children. If one child receives a helping hand onto the property ladder, friction within the family could be caused, in particular if the parent is not in a financial position to equalise the gift to children at the same time. It may well be sensible to consider recording the gift in your Will, and making provision so that all are treated in an equitable fashion over time.
Engage with financial and legal advice
Many parents are happy to open the doors of the Bank of Mum and Dad, and do the best they can for their children. There are, however, a number of financial and legal considerations that need careful thought. A good solicitor should be able to provide the necessary advice to protect the gift in the event of relationship breakdown, and any changes that may be appropriate to your Will.
At FAS, we can provide assistance to parents who wish to use their funds to help their children. We can advise on which assets are gifted, and the potential financial impact of any actions taken on their financial security. Speak to one of our experienced advisers for assistance.
If you would like to discuss the above with one of our experienced financial planners, please get in touch here.
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