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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.
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.
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.
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.
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.
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.
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:
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.
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.