First time buyers are finding it harder than ever to get the money together to finance their first
home and increasingly turning to the Bank of Mum and Dad for help. But what are the options and what do you need to watch for? With property prices out of sync with wages, high rents and harsher lending criteria, it’s no surprise people need a helping hand to get into home ownership.
Before you make any decisions, seek advice
Helping your child get on the housing ladder may seem like the right thing to do but you should not let it compromise your own financial security.
Think about your options and their long-term implications and always seek independent financial advice for your situation.
Most banks will not accept a deposit that has been borrowed because the money comes with strings attached.
Gifting money
The majority of parents give their children the gift of cash to help them with their deposit and boost their borrowing power so they can access a cheaper mortgage deal.
Most banks will accept a deposit that has been gifted (or partly gifted) and they will ask for written confirmation from you stating it is a true gift. They basically want to know that if the worst came to worse and they had to repossess the house, you don’t have an interest in the property.
Are there any tax implications to gifting money?
You should always seek independent financial advice.
When it comes to inheritance tax, it is all about the ‘seven year rule’. You can give as much as you want without incurring inheritance tax, provided you are still alive after seven years.
If your estate is worth more than £325,000 and you die within seven years, your child may get landed with an inheritance tax bill.
Gifts of up to £3,000 within a tax year are exempt from inheritance tax.
Lending money
Most banks will not accept a deposit that has been borrowed because the money comes with strings attached.
Alternatives to a Gift or Loan
If you cannot afford to give your child a lump sum of money, there are other options which include:
• Guarantor mortgages
A guarantor mortgage is a product where you, as a parent or close relative, act as a guarantor for the mortgage debt. Essentially, you are agreeing to cover the mortgage payments if your child fails to do so.
The guarantor can be removed from the mortgage at a later date if your child can prove they are able to take on the debt by themselves.
• Buy a property with your child
You could take out a joint mortgage with your child, making you equally liable for the repayment of the loan. The upside is that with your combined incomes, you may be able afford to take on a larger loan.
If you already own a property, it would be counted as a second home, so you would have to pay additional 3% on existing stamp duty rates.
If it is your second home and you are still on the mortgage when the property is sold, there may be capital gains tax (CGT) liabilities.
Some lenders will let you take on a joint mortgage but your name doesn’t have to be added to the property’s title deeds, allowing you to side step paying CGT.
Always make sure you get the right advice before you make any decisions.
How can I protect my money?
If you are giving your child money for a deposit and they are buying with their partner or friend, you can protect the money you have gifted in the event they split up. Have a Declaration of Trust document drawn up that states who owns what part of the property in the event of sale. This is usually a fairly straightforward document that can be drawn up at the time the purchase transaction is proceeding. You may also wish to think about having a Will which can set out to whom your share of the property would pass in the event of death.
If you would like further advice, and you are thinking of either helping your child buy their home or looking to buy for yourself, please feel free to contact our expert solicitor, by telephone, complete the free enquiry form, or email us on:
advice@geoffreylurie.com
