Leading County Durham law firm Latimer Hinks is warning parents thinking about helping grown-up children onto the property ladder through the “Bank of Mum and Dad” to go into any arrangement with their eyes wide open.
New research found that parents across the UK are set to lend their children a collective £5bn this year to help them onto the property ladder.
Parents will help to finance a quarter of all UK mortgage transactions this year. If the “Bank of Mum and Dad” really were a bank, it would be in the top 10 of the country’s mortgage providers.
On average, parents will give their grown-up children a contribution of seven per cent of their purchase price, helping out with a total of 300,000 mortgages. In the North East, where average property prices are £155,000, that could be around £10,850.
But tax experts at Latimer Hinks say it is vital parents and children thinking about making and accepting an offer of financial help consider all of the implications.
Latimer Hinks Director, Elizabeth Armstrong said: “While most parents, so long as they can afford to do so, are only too happy to help their children realise their dream of home ownership, it’s important that both sides know exactly where they stand.
“There are many different ways of financing a property with parental involvement and there are often tax implications to consider so what works for one family won’t necessarily work for another.”
It’s important to think about all of the implications involved. Gifting money can have Inheritance Tax (IHT) consequences.
IHT is paid if a person’s estate (i.e. what they own when they die) plus the value of gifts in the 7 years before death exceeds £325,000. It may well make sense to reduce an IHT liability by gifting money to grown-up children to help with their property purchase. If the donor parent survives for 7 years after making the gift, its value will escape IHT.
Some gifts aren’t liable for IHT at all. It is possible to give away £3,000 each year without any IHT implications. You can also give away £5,000 if a child is getting married. So, if your grown-up son or daughter is getting married and buying a home in the same year, then you could hand over £8,000 without fearing that they will be hit with a tax bill. But an important consideration is what will happen to the gift if your child is buying with a partner and they subsequently separate.
A decision will need to be made about whether the money is a gift or a loan. Gifts are not repayable but loans are repayable. Any loan agreement between parent and child must be disclosed to any mortgage provider to be factored into the affordability assessment. So it may be a case of giving with one hand and taking with another as lending capability can be reduced as a result of loan repayments.
Another option is for parents to act as guarantors on a mortgage application, meaning their income is also taken into account when agreeing a deal, which may allow more to be borrowed. However, a parent will have to be willing to cover mortgage payments if the child becomes unable to pay.
A further choice could be to take out a joint mortgage on the property, with a parent legally owning a share of the home and both parties jointly liable for mortgage repayments. However, that has its own issues as Inheritance Tax and Capital Gains Tax could eventually be payable on a parent’s share.
There are even options involving using Trusts as a way of structuring things.
Elizabeth added: “While Bank of Mum and Dad may well be the most generous lending facility in the land, with low or no interest repayments, and often debts being written off entirely, it’s important to seek advice to make sure all parties know where they stand. Changes to Wills may also be required to reduce the risk of future family disputes.”