Bank of Mum & Dad:
The implications of helping the younger generation getting on the property ladder
Helping the younger generation to get an all important foot on the property ladder may be the only option for many parents but what should we, as parents, consider before shelling out the deposit?
Perhaps the simplest way to help the younger generation in getting a foot on the property ladder, is by giving them a decent sized deposit as a GIFT. There are no tax implications on this gift of money, as parents can pass money (as much as they like!) to their children without incurring any tax liability.
However, if you (the parent) pass away within seven years of making the gift then it may be subject to Inheritance Tax. Where your Estate is worth more than £325,000 (the current Inheritance Tax Threshold) Inheritance will be payable on everything over this amount, including any gifts given within the seven years prior to your death.
Where money is gifted and the property is being bought by your child with a partner, it may be worth considering what would happen should the relationship between your child and their partner take a downturn and the property ultimately be sold.
Possibly a better option for parents not in a position to give an outright gift, is to LOAN your children the money for a deposit.
However, some mortgage companies may not be prepared to enter into arrangements where money has been loaned and so this could limit the mortgage options. Where a mortgage company is happy to accept the arrangement, they may want to know the exact repayment arrangements in order that these can be taken into account when calculating the mortgage and affordability and therefore meaning that a lower amount can be borrowed.Where you have loaned the money and receive repayments, you may be liable to Income Tax on any interest that you charge on the loan amount (if any interest is charged).
If you are going to loan the money, then it would be worthwhile drawing up a formal loan agreement to include all of the agreed terms in relation to repayment, any interest and the expectations of each party.
Another option would be for you to BUY THE PROPERTY with your child. You could purchase the property as TENANTS IN COMMON to reflect the amount of the property that is owned by each individual (perhaps dependant on the amount that you are putting into the property and how the mortgage will be paid).
However, if this means that you would own more than one property then it will count as a second home and you would therefore be liable to an additional 3% on Stamp Duty and may also have Capital Gains Tax implications when the property is sold if you are still listed on the property as an owner/proprietor at Land Registry or on the mortgage.
If this option is taken, it would be advisable to draw up a Declaration of Trust to include the proportions owned by each person and what happens if one party wants to sell.
So, although helping your children take that all important step to get on to the property ladder may seem like a great idea, it is extremely important to think about the best way of doing this…for yourself and for your children!
If you would like a FREE chat to discuss your options, get in touch on info@TotalLegacyCare.co.uk or 01727 865 121
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