For many aspiring homeowners, it is near impossible to buy without help from family members and friends. It is therefore perhaps not surprising that the ‘Bank of Mum and Dad’ is now one of the top ten funding suppliers in the country.
Initial thoughts?
If you decide to lend a helping hand, whether this is by a gift or loan, you need to be sure that you are going about it in the right way; to protect your own interests, as well as your children’s.
Helping your children financially to step onto the property ladder should seek to avoid compromising your own financial security. Therefore, carefully consider your options and their long-term implications, and if appropriate seek independent financial and legal advice for your own particular situation.
Is the contribution a gift or loan?
For both parties, it is best to be open and clear about the arrangement: namely whether the sum of money is a gift or a loan.
In many situations, the money will be gifted, and is often done as part of inheritance tax estate planning. Please see below for further details.
If it is a loan, you may wish to consider formalising the terms on which the loan has been granted, to include how and when it is to be repaid. There are various ways to assist in providing parents with some security in such an investment.
Lender Issues
If a child is obtaining a mortgage in order to purchase the property, then the Lender’s requirements will need to be considered in respect of any financial arrangement being considered.
In some circumstances, Lenders will not accept a deposit that has been loaned from a parent, due to the potential risk of the parent lender later asserting an interest in the property. As such, this could limit lending options available
If the monies being provided are a gift, then a majority of Lenders will ask that the parent(s) sign a declaration to confirm the gift, and to also confirm that they have no interest in the property. Further due diligence will also need to be conducted on the donor, for anti-money laundering purposes.
Family Law and IHT Considerations
Careful thought needs to be given to property purchases involving gifts/loans to children when they are purchasing a property jointly with their partner. There are various options available to assist in providing protection in the event of a breakdown of the relationship, such as a Declaration of Trust or Cohabitation Agreement.
Gifting money can also have consequences for Inheritance Tax (IHT). Generally, to enable a gift to pass entirely exempt of IHT, the donor must survive for seven years or more from the date of the gift. It is therefore important that consideration for effective tax planning is made before parting with any gifts.
Other options
There are other options that enable you to help your children, without having to contribute by way of gift or loan. It is becoming common for parents to act as guarantors for home purchases, or for a parent and child to take out a joint mortgage on a property, known as a ‘joint borrower, sole proprietor’ mortgage.
A guarantor mortgage is a product which requires a parent or close relative to act as a guarantor for 100% of the mortgage debt. Essentially, this means that the guarantor agrees to cover the mortgage payments if the borrower fails to do so.
It is important to be clear that there are risks in all of these approaches. Peacock & Co has both a specialist Private Client and Residential Property team that would be more than happy to assist you with any questions.