Recent figures from Legal & General suggest that lending from parents to assist their children to get on the UK property ladder will reach £5 billion in 2016.
Whilst no doubt this support is invaluable, it does bring with it a complex set of issues to consider. If you are intending to contribute towards your child’s property purchase then there are a number of ways in which you can do this. But how do the various options affect your own estate and your own inheritance tax position?
If you decide to loan the funds to your child then you may wish to protect your contribution by way of a Loan Agreement or a Declaration of Trust. These documents would clearly record your contribution and would enable you to recover the money you have lent if the property is sold or re-mortgaged in the future.
Your contribution will still be included in your estate for Inheritance Tax (IHT) purposes either because the money is still owed to you under the terms of a Loan Agreement, or because the money has already been repaid to you or because in fact you have simply exchanged the money which you previously had for a share in an investment property, which would be documented in a Declaration of Trust. In each of these cases, the value of the loan made has never actually left your estate. There are also Capital Gains Tax and Stamp Duty implications to consider, particularly if your contribution is viewed as an investment in a second property.
You may decide, however, that you are happy not to receive your contribution back and you would therefore be making a gift to your child. For IHT purposes, the gift will only be fully exempt from inheritance tax if you survive seven years from the date of the gift. If you die within the seven-year period, the value of the gift is brought back into your estate for IHT purposes.
Further, you will have no control over what subsequently happens to the money particularly in the event of a breakdown of your child’s relationship (now or in the future) or difficulties your child may encounter in running their own business. You may need to put a Will in place to reflect the changes in your estate as a result of the gift to your child. Your Will can stipulate that any lifetime gifts are taken into account when distributing your estate, which may be a useful way of equalising assets between children if lifetime gifts have only been made to one child previously.