For many young first-time buyers, it has been fairly common to receive a contribution from parents or family members to help with a house purchase. But with mortgage rates at a 15 year high, does the Bank of Mum and Dad really work?
You need to ensure that you can afford this level of financial support. This is important as once invested in a property, you will not be able to access the funds.
Then there are three ways parents can provide their children with funds to help them buy a house.
Gifts
You can give away up to £3,ooo each per year tax-free (£6,000 if you haven’t made any gifts in the previous tax year). You can also make a tax-free gift to a child of up to £5,000 in the year in which they get married.
The principle tax to consider is inheritance tax (IHT). With larger gifts, these will be ‘possibly exempt transfers’ – if you survive the gift for seven years, it will not be liable for IHT. This is commonly referred to as ‘seven-year rule’ gifts.
However, if you were to die within the seven years, the gift may be taxed at 40% (depending on the size of the gift and available allowances at the time of death), with the potential tax liability tapering down after three years.
Any substantial gifts should be formally documented in a letter or deed of gift so that there is a record for future reference or in case the mortgage company requires evidence of the gift. If your child is purchasing the property with a partner, you should also consider putting a cohabitation agreement in place as this will help to determine how the property should be divided if the relationship ends.
Trusts
A trust adds a level of security and will be beneficial if you have any concerns about how your children might manage the money if it is not immediately invested in a house.
As trustees, you can continue to control the funds until such time as your children are ready to purchase a property.
Provided you do not put any more than your tax-free allowance for IHT, or ‘nil rate band’ (currently £325,000 each) into trust, there will be no immediate IHT implications of doing so and you will start the seven-year clock running to remove the funds from your estates.
The taxation of trusts is a complex area and we always suggest you take legal advice before going down this route.
Loans
A loan will not reduce your IHT bill as the loan will be an asset in your estates. However, it does offer a little more control that an outright gift. You should be aware that a loaned deposit may restrict the availability of certain mortgages.
If you later choose to gift your loan, any outstanding balance will at that point be subject to the seven-year rule for IHT. As with gifts, any loans should be formally documented.
Other ways to help
Family Offset mortgages and buying jointly with your child offer alternatives ways to make a mortgage more affordable, although there are risks and considerations associated with both.
For more information on the specialist mortgages, please contact Residential Property Partner Alison Treble. For expert advice on tax and trusts, please contact Anne-Marie Worth. We are here to help.
