Many people want to help their children navigate the housing ladder but are unsure of how best to proceed. There are a number of factors to consider including Stamp Duty, Capital Gains Tax, Inheritance Tax and the relationship with the mortgage lender.
It is important to establish your goal: do you want to make an outright gift to your child or do you want there to be strings attached? Some parents wish to retain some control over the money given to support a house purchase e.g., can the money be protected in the case of any future relationship breakdown?
From an Inheritance Tax perspective, making an outright gift means it is exempt if you survive for seven years. Mortgage lenders often insist on parents signing a written confirmation that any contribution made to their child’s purchase price is an outright gift and that there are no conditions to that gift.
There are alternatives to making an outright gift including buying the property jointly with your child. This is usually not recommended as it triggers a potential capital gains tax liability and often means that higher rate stamp duty is payable at 3% over the ‘normal’ rate.
Another alternative is to take a legal charge over the property. This is appropriate in circumstances where you wish to see the return of the money at some future point. This is a loan rather than a gift and, again, different considerations apply from a taxation perspective.
You can also have a trust deed which regulates the arrangement. This means that you can ‘ring fence’ your contribution towards the purchase price and prevent it being claimed in any future relationship breakdown. A trust deed is more flexible and can include provisions tailored to your particular situation and wishes.
Lenders have begun to respond to the market with more flexible products whereby parents can guarantee loans to their children allowing them to borrow more whilst avoiding the parents being named on the deeds to the property.
As always there is never a one size fits all solution but getting it right is vital to protect everyone’s interests and avoid giving money not to the children but to the tax man!
If you would like advice in relation to topics discussed in this article please contact Richard Atkins on tel 01582 765111 or email firstname.lastname@example.org.