Options For Helping Your Children Buy A Home | Parfitt Cresswell
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Helping your Children Buy a Home

Whether through a lack of capital for a deposit or the inability to meet monthly mortgage payments, purchasing power amongst younger generations is lower than it has been for decades and many parents want to be able to help their children if they are struggling to buy a house. There are many ways in which you can offer help, whether legal, financial or relating to tax, but also several pitfalls to be aware of.

Options for helping your children buy a home

Outright purchase

You may be in a position to fund the outright purchase of a property for your child, which generally causes the fewest ongoing problems. Providing the person making the gift (you would be known as the donor) lives for seven years following the date of the purchase, the gift is exempt from Inheritance Tax (IHT) and may even reduce the remaining estate below the tax threshold. Since the property will be in your child’s name, it will count as their main residence for Capital Gains Tax (CGT) purposes.

Providing a deposit

If perhaps you cannot afford, or do not want, to fund the whole purchase of a property, you might choose to help by giving your children money for a deposit. However, you should be aware that giving away any sum can also have potential Inheritance Tax consequences, unless the donor survives for seven years.

You may, however, be able to take advantage of the annual exemption for gifts. Any unused exemption can be carried forward to the next year so, if you have not gifted your children within previous years, you are able to gift to a child equivalent to twice the annual exemption for a deposit without Inheritance Tax consequences.

Help with mortgage payments

If you do not have substantial capital sums to give away to your children, but have some surplus income which you would be willing to give to your child to support mortgage payments, this is another option.

Another IHT exemption may help with such contributions. You can achieve 100% Inheritance Tax relief if you can show that regular gifts of income are in excess of your day to day needs. You may need to satisfy some technical requirements in order to claim this exemption, so we would recommend seeking professional advice before relying on this. Additionally, the payments may also fall within the £3000 annual exemption mentioned above.

Acting as a mortgage guarantor for your child

By acting as a guarantor on your child's mortgage, a lender may enable a larger sum to be borrowed as your income will be considered as well as your child’s. This can be a risky option however, as you are putting your own assets at risk in the event that the mortgage payments cannot be met. There may also be adverse tax consequences, so it is advisable to seek professional comment beforehand.

Joint purchase of a property

Sometimes properties are purchased in the joint names of the parents and a child, either in the hope that this will give more protection for your money or with a view to joint occupation of the property.

These arrangements must be properly documented to record the contributions of both parties and their intentions in relation to the money, providing you with protection in the event of your child experiencing a relationship breakdown or financial difficulty.

There can be tax problems with such arrangements of a joint purchase, particularly in relation to CGT, and professional advice should be taken before proceeding.

Other arrangements

There are several other options for helping your child to buy a home, the choice of which is the most appropriate will depend on a number of factors. For example:

  • the ages and family circumstances of both parties
  • the amount of spare income and capital
  • the parties' eventual intentions about where they should live.

You may want to raise money against your own property by way of equity release if you feel it is better for your child to have the money now, than upon your death.

Alternatively, you might have property that you are prepared to transfer but would like placed in a trust so that future generations of your family can also benefit. It is important that professional advice is taken before entering into any such arrangement.

Drawbacks to be aware of

  • Financial circumstances change - even yours. Before making any gift, or entering into any kind of financial commitment, consider whether you can still afford it, even if your own financial circumstances changed in the worst way you can imagine
  • A gift is a gift - once you hand money over, it is legally the possession of the person to whom it is given (the donee) and cannot be reclaimed, however strong your moral case might be. For example, if the recipient of your monetary gift dies, the money, or the asset purchased with it, will form part of their estate and will go to the beneficiaries under their will, or, if there is no will, to those who inherit on intestacy
  • With the previous point in mind, it is important to consider that any spouse, civil partner or possibly a cohabitant, may have a claim on this asset if the relationship ends. A pre-nuptial or pre-cohabitation contract may offer some protection but has no binding legal status in English law.
  • If your child is obtaining a mortgage to fund part of the purchase price, the lender will require knowledge of where the funds are coming from. If you are making this contribution, this will need to be disclosed to the lender and you may also need to provide evidence you do not require the return of funds. You may even need separate legal representation.
  • Many parents want to help a child onto the housing ladder, but do not want to make an outright gift of funds. If money is only being loaned to the child, parents will require a legal charge over the property being purchased, but beware of this option as many institutional lenders will not lend to the child in these circumstances.

How we can help

There are many other options for supporting the funding of a property, including private mortgages, the use of trusts, equity release, or the transfer of the family home, that we would always recommending seeking professional help before making any decisions. At Parfitt Cresswell, our experienced solicitors can advise on all aspects of property transactions to find the solution which best suits you and your family, whilst being the most effective from a tax planning perspective.

For information of users: This material is published for the information of clients. It provides only an overview of the regulations in force at the date of publication, and no action should be taken without consulting the detailed legislation or seeking professional advice. Therefore no responsibility for loss occasioned by any person acting or refraining from action as a result of the material can be accepted by the authors or the firm.

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Each month we have a limited number of complimentary initial consultations available (value £200). To apply click here.