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It is no surprise that first time buyers here in the UK are having a tough time of getting the money together for a deposit to put down for a place of their own.
Property prices being what they are many are going to the Bank of Mum and Dad to borrow the money for their deposit.
If you are looking to help your children to get onto the property ladder there are some things you need to know first.
Many people dream of being able to own their own property but simply cannot afford to either due to high property prices or they are finding it difficult to rise the money for a deposit.
More people than ever now turn to the Bank of Mum and Dad to get the money to put down a deposit.
According to research carried out by Legal & General around 25% of mortgage transactions are funded by the Bank of Mum and Dad.
An interesting number is that the Bank of Mum and Dad is the 12th biggest lender in the UK and lent £5.7 billion in 2018 to help get their children onto the property ladder.
Fortunately, there are many ways in which this can work. Read through the rest of the article to find out the benefits and drawbacks to each option.
Yes, always speak to conveyancing solicitors and financial advisors before helping anyone with a mortgage. Mortgages are very large sums of money and parents despite their best intentions could find themselves out of pocket if for example the child is in a relationship which breaks down and the partner makes off with half the property.
Contact the following organisation before getting started with the mortgage: independent financial advice.
Yes, but banks will want written confirmation that the money is a gift and not a loan. This is for affordability checks and also if they ever need to repossess the property, they are not having to share the interest in the property with any other party.
Currently parents can gift up to £3,000 to their children each year, this is exempt from inheritance tax.
Parents can also carry over any unused allowance from the previous year. So, two parents are able to gift a child £12,000 which is exempt from inheritance tax provided they have not gifted any money to anyone else in the last 24 months (2 years).
If parents give as a gift more than those amounts, then the money may be liable for inheritance tax.
If a parent who gifted the money survives 7 years past the date that the gift was given, then that gift would be classed as part of their estate for inheritance tax purposes.
As an example, if the estate is more than £325,000, then up to 40% tax would be due on the excess.
The amount of Tax due on the gift is a sliding scale and calculated on a pro-rata basis.
The left-hand column is the IHT (Inheritance Tax Rate), the column on the right is the number of years between the date of the gift and the time of death of parent.
|Inheritance Tax rate||Years|
|40%||Less than three|
|0%||Seven or more|
These rules are to prevent parents from handing over their entire estate on their death bed to avoid inheritance tax. Remember the government will always want their cut.
Some parents may not want to gift the money to their children but lend it to them instead. This is quite easy enough to do, all that is required is to draw up a loan agreement which will set out the terms and conditions when the loan is to be repaid and what If any interest will be paid on the loan.
The loan agreement can also include clauses such as what happens if the house is sold, or if the child is buying with their partner and they divorce, or worse case scenario if the child dies before the loan is repaid.
With this loan from Bank of Mum and Dad, they can now approach a mortgage lender. The mortgage lender must be told about the loan and they must be shown the loan agreement. They may not be too comfortable if the loan comes with too much of a burden on the borrower that they may struggle financially to repay the loan.
One of a parent’s major concern when gifting or lending money to a child for a deposit for a property which they are buying with a partner or friend is what happens if their relationship breaks down.
In this case the parent will need to work with the solicitor who is dealing with the property purchase to draw up a declaration of trust, also referred to as deed of trust.
The purpose of the declaration of trust is to state to whom the money was gifted to. It would state that the money was a gift to the child and not the partner so that if the relationship were to end the declaration of trust would ensure that the child has ownership of the gift.
The declaration of trust will also out line if the money was a loan or a gift along with laying out what will happen to the property should the relationship fail.
There are situations where the declaration of trust may be affected for instance, if the child and their partner were to go on and get married. This would require the parent to write their will or update it to declare that the gift was made to the child. The child should also make or update their will to state that in the event of their death that all the gifted money returns to the parents.
It is not always possible for a parent to have the money to either gift or loan to their children. There are alternatives to handing over cold hard cash.
1. Savings as security
If a parent does have savings but they do not want to have to give it to their child, they could consider using their savings for an offset mortgage. There are a few mortgage deals about which will allow a parent to offset against their child’s mortgage. The benefit to this is that the child would pay less interest on their mortgage repayments.
The downside to the offset mortgage is that the parent will not be able to access their savings until the mortgage term is up. These types of mortgages are called “Family offset mortgages”
2. Using Equity as security
A parent could use the equity in their home as security against the loan. If the child takes out a 100% mortgage the parent could use the equity in their home as collateral against the loan.
The downside to this is if the child cannot keep up repayments and they default on the mortgage the parent’s home could be at risk and the parent would be liable for part of the loan.
3. Buy a property with your child
Another way to finance the mortgage is to take out a joint mortgage with your child.
The upside to this is that repayments will be easier if both the parent and child are repaying the mortgage. The downside is that the parent is now equally liable for the repayments.
Another drawback is that if the parent already owns another property then this property would count as a second property and therefore attracting higher stamp duty. This could make the mortgage more expensive.
There is also the question of capital gains tax (CGT). If the property is sold and it is considered a second home the parent will have to consider CGT liabilities. There are some lenders out there who will let a parent and child take out a joint mortgage and not have the parents name on the properties title.
4. Guarantor mortgages
This type of mortgage
is where the parent will act as a guarantor for the entire mortgage. If the
child is unable to repay the mortgage, then the parent will take over the
For a parent to gift money to their child to help them to buy a property is a great thing but there are some things that a parent needs to be aware of.
A tax-free gift: If the parent/s survives 7 years from the date of the gift then that gift is tax free. This also helps to reduce the size of the parent’s estate which of course in turn will reduce the IHT liabilities in the future.
Better mortgage options: Having a larger deposit will allow access to a wider option of mortgages to choose from.
A Nicer property: By having more money for a deposit could mean the child is able to purchase a nicer larger property in a better area.
Lower monthly repayments: The bigger the deposit from the Bank of Mum and Dad the lower the monthly repayments will be.
Reduced mortgage options if loaning: If the money is a loan rather than a gift it could mean fewer mortgage options are available since some mortgage lenders do not like someone else having an interest in the property.
Smaller savings: A parent could put themselves into financial difficulty if they gift or lend too much money.
Proof of Funds: When parents lend the money, they must provide proof of where the money has come from in an effort to prevent money laundering.
Family tensions: Parents will feel obliged to lend to all their children the same. So, if a parent lends to one but not another it could cause family problems.
Going their separate ways: If the relationship were to breakdown the parent must ensure that their money will not be taken by the partner of the child. This is done via a deed of trust, or declaration of trust.
Debt management agencies are regulated by The Financial Conduct Authority
Many people in the U.K struggle with debts and many do not know how to start to repay them speaking to a debt advisor is one of the best things you will do along with taking action yourself by speaking directly with your creditors.
https://www.nationaldebtline.org/ and https://www.moneyadviceservice.org.uk
You should always seek professional advice when handling debt problems. Cashute are not licensed debt advisers and any information contained in this article should not be taken as legal advice. It is your Responsibility to seek out correct legal advice