Many young people are struggling to find the necessary capital for a deposit to get their foot on the property ladder.
There is pressure from some in government to make it easier for parents and/or grandparents to release money from pensions so that the “bank of Mum and Dad” is more readily available.
If you are thinking of providing financial support to your children, we have given some guidance below to some of the questions that we are regularly asked.
I want to pay part of my child’s deposit. Do I make a gift or a loan?
Firstly you need to decide whether you will need the money back at any time. If the answer to this question is “yes” then the money must be loaned.
If you decide to make a gift of the deposit you need to be aware that, once paid, you have no right to reclaim the money whatever your or your child’s financial circumstances.
My child is buying the property with another person. How do I protect the investment?
If you are making a loan to your child this can be protected by a Charge being registered at the Land Registry.
If your child is raising a mortgage to finance the purchase, they will need to obtain consent for you to have a second Charge. Whilst some lenders may object initially, it is worth persevering as a Charge is the best way to secure your money.
If you are making a gift, you need to decide and document whether the gift is just to your child or to them and their partner. If the gift is to your child then you need to ensure they protect their interest by entering into a Deed of Trust and/or a Co-habitation Agreement.
Are there any taxation issues I should consider?
If you gift money to your child, provided you survive for seven years, the gift will be a potentially exempt transfer (PET) for Inheritance Tax purposes. If your child lives in the property as their principal/main residence, any gain will be exempt from Capital Gains Tax (CGT).
Gifting money to your child to invest in a property can therefore be a very efficient method of tax planning.
If you make a loan to your child any interest payable will be part of your income for tax purposes. In addition, if the loan is for a percentage share of the property, any increase in value over your annual exemption (currently £11,000) will be chargeable to CGT.
Will I need to see my own Solicitor?
The answer to this question is almost certainly yes – particularly if the money advanced is a loan. Whilst this will increase costs, if you wish to protect your and your child’s investment, it is important to ensure the nature of the transaction and the intentions of all parties are properly considered and protected.