Articles

Published by: Richard Crocker

The Bank of Mum and Dad: A Top 10 Mortgage Lender

According to data from Legal & General, lending from parents to help their children get on the UK property ladder will amount to £5bn in 2016.

If combined into a formal business Mum and Dad would be a top 10 UK mortgage lender. However, it’s not as simple as it may seem; Mum and Dad need to choose between the following options:

Making a gift

Your mortgage lender needs to confirm the gift is acceptable. This needs to be dealt with asap to ensure there are no delays.

If an outright gift, Mum and Dad have no control over what happens next and need to consider how their contribution would be treated in any future breakdown of the child’s relationship.

The value of the gift is potentially exempt from Inheritance Tax (IHT) provided the donor survives seven years.  If Mum and Dad have to sell assets to make the gift, they may incur a capital gains tax (CGT) charge.  An outright gift of cash is not subject to CGT.

Making a Loan

In some cases, parents may wish to recover the monies used to acquire a property if it is sold or remortgaged.

Any commercial lender will need to approve the loan, and will require priority over Mum and Dad in terms of repayment when the property is sold.

The parties should enter into a loan agreement. Mum and Dad may register a charge on the property at the Land Registry to protect their right to repayment of the loan, but this will require agreement with any commercial lender.

Taking an ownership share

Mum and Dad could purchase a stake in the property.  This should be documented in a declaration of trust which covers how the equity will be split on a future sale (or death of any of the parties), who is to cover property expenses (council tax, insurance etc.), who is responsible for any mortgage, and any rights of occupation.

CGT may be a problem in raising funds to purchase the ownership share, and could be an issue if the property increases in value before it is sold, unless the property is the owners’ main residence.

If Mum and Dad already own another property, a 3% surcharge over the normal SDLT rate is likely to be charged.

With the Bank of Mum and Dad due to provide deposits for more than 300,000 mortgages for homes worth £77bn in 2016, getting the right processes in place will help to ensure a successful outcome for all.