The bank of mum and dad – helping your child buy a home

It is a well-known reality that first-time buyers struggle to come up with the funds for a deposit and it is increasingly common that they are using help from parents and other family members. It is estimated that parents spend around £8 billion a year assisting their children buy a property. Although it is both appreciated by buyers and admired by outsiders it does not solve the real problem in the housing market and there are several considerations that parents should understand before they gift or loan money to their children to assist with their purchase. This scenario is of particular interest when it comes to conveyancing transactions.

Should you take financial advice before you help your child buy a home?

It has been reported by the London School of Economics that only 8% of those who give money to their children for a deposit receive financial advice and only 14% take legal advice. The money whether given as a gift or a loan seems to be a casual affair with very little written records of arrangements or transactions and lack of clarity as to whether the money is a gift or a loan.

However, although those giving funds tend to be in a financially comfortable position to do so, a recent study shows that over 17% of over 55s were enduring a lower standard of living due to assisting their children with their purchase. There are several considerations when gifting or loaning money and several complications that may arise regarding the funds in the future, such as family fall outs, deaths and tax implications. Therefore, it is the safest option to seek advice before making financial decisions that could impact on your current or future financial security.

The options to consider

It should be considered whether the money that parents are giving is an outright gift or a loan. If the money is an outright gift, then the person making the gift should carefully consider if they can afford to do this and whether there will be any tax implications (see below). If the money is going to be a loan, then considerations should be given as to interest and repayments. Although the loaning of money may seem a more casual affair when within the reems of a family it is advisable that the repayment plan and any interest is put into writing so that both sides know exactly where they stand in the future.

It is also important to consider how the money will be given as this can affect a buyer’s mortgage. Most mortgage lenders will accept a deposit which has been gifted/partly gifted by parents, but they seem to be more apprehensive if this is a loan and there are repayments that need to be considered in the borrower’s finances. For example, if there was a regular repayment the lender would want to know how much this was for to consider whether they could make their mortgage repayments in addition to the loan repayments. This could have major implications to the mortgage being agreed and some banks simply won’t accept a borrowed deposit due to the strings attached.

If it is a loan that you will be giving, then a loan agreement should be drawn up, which is fairly simple to do. It should set out the terms of repayment, any interest being paid on the loan and what is to happen to the money if anyone involved in the loan dies. It is sensible to seek advice when drawing up this agreement from a financial advisor or solicitor in order to ensure that the loan agreement is correctly drafted.

Are there any tax implications?

When a gift of money is given by a parent to assist in the purchase of a house there is no immediate tax due on this transaction by either the parents or the child. However, those giving the gift should consider the potential inheritance tax implications that could occur later. Due to the annual exception currently in place everyone is allowed to give up to £3,000 a year which is exempt from inheritance tax charges and if you have not used your allowance from the previous year you can carry this forward. This therefore means that if you had not gifted any money for the current or the previous year you could gift £6,000 (£12,000 if it were two parents) to assist in a purchase without any tax implications. You can learn more about how to avoid taxes on inheritance and even consult with professionals from Woodruff

However, if you want to give more than that amount, or you do not have your annual allowance available at the time of the gift then this could give rise to inheritance tax. This will only occur if the parent gifting the money is to die within 7 years of the gift. If this is to happen depending on their total estate there could be up to 40% inheritance tax due on the gift. This amount will be tapered depending on how long ago the gift was made and therefore the tax due on the gift cannot be predicted.

There are no inheritance tax implications if the money is loaned and not gifted however if there is interest charged on the loan then income tax should be considered as it may become payable. Tax advice should therefore be taken before either a gift or a loan is agreed on.

The advantages and disadvantages

Advantages

Provided that you live 7 years from giving the gift it will be tax free and have no inheritance tax complications. It could also benefit your tax position if your estate is large as it will reduce the overall size of the estate and provided you live the 7 years will reduce any future inheritance tax bill.

If you agree on a loan for the funds with little or no interest this can mean that less is paid overall by the buyer. Additionally, if a large loan/gift can be given then a bigger deposit can be put down and in turn reduce the monthly repayments.

A fundamental advantage is that the buyer will be on the housing market and with the help from Mum and Dad could end up with a better or bigger property, reducing the chance of them moving again and incurring further costs. Additionally, a larger deposit can mean that there are more options available for their mortgage.

Disadvantages

As discussed above, mortgage lenders are often reluctant to give mortgage offers to those who are taking a loan for the deposit due to the repayments. Mortgage lenders, estate agents and solicitors will also most likely request to see proof the funds during the transaction and parents will also have to show where the money they are gifting has come from. This can mean that parents will have to present evidence, bank statements and certified ID which may become inconvenient.

Relationship breakdowns are a huge consideration and if a couple who buy a house together have received funds from one person’s parent this can present difficulty if they end their relationship. You as a parent could end up with your child’s ex taking half your money. In order to prevent this, you should get a deed of trust drawn up.

Giving a large amount of money to your children could mean that you have financial difficulties of your own in the future. In order to prevent this, you should asses your finances for both now and in the future and seek advice to successfully plan.

Therefore, before you open up the branch of Mum and Dad you should carefully consider your options and potential implications.

Disclaimer – our articles are designed to give you guidance and information.  There is no substitute for proper direct advice, particularly as everyone’s circumstances are different.  If anything in this article may affect you, please contact Express Conevaycning for advice that is specific to your circumstances.