Next Generation Buyers – Supporting your family onto the property ladder
You might like to think, as a parent, that having seen your son or daughter through school and university (often at huge expense) you can sit back and relax a little and plan for your own retirement. Unfortunately, all too often that is not the case and instead you face the next significant financial hurdle; helping him or her onto the housing ladder. While the current generation of 50-somethings might have been able to get to acquire their first property with minimal or no help from their parents that is now nigh-on impossible for the current generation, unless they are either extremely successful financially or are prepared to wait to buy their first home until they are in their mid to late 30s. So, the solution for those fortunate enough to be able to do so is to resort to the so- called “bank of mum and dad” or the “bank of family”.
For those who are considering embarking on that process what are the legal and financial pitfalls and how best should they proceed? This article seeks to provide some guidance on those points.
Legal and Financial Considerations
If parents (or grandparents) are going to assist with the purchase of a property, there are a number of questions that need to be considered before proceeding. These include: whose name is the property going to be in, how much do you trust them, what restrictions should you put on the title, if any, how are you/they going to finance it, can you or they get a mortgage, how do you minimise stamp duty and other taxes and, even, what happens in the event of their death, to name a few. Unsurprisingly there is no simple answer to any of these questions and no simple one-size-fits-all solution. Each family is likely to have its own circumstances. Having said that there are some general points and advice that can be given.
Ownership
Generally, if the purpose of the exercise is to help the next generation to acquire a property then it makes sense for the property to be in their name, whether it be in the individual name of one son or daughter or the joint names of siblings. By putting the property in their name you ensure that any increase in value accumulates to them rather than the parent, and if they are able to show it is their principal residence they will potentially benefit from the principal residence exemption from Capital Gains Tax (CGT). They may also benefit from the first-time buyer’s exemption from Stamp Duty Land Tax (SDLT). If they are able to obtain a mortgage the lender is likely to expect and require the property to be in their name.
But all this potentially comes at the price of a loss of control. Do you really trust your young and inexperienced son or daughter to have complete control over the property and to be able to sell it and dissipate your hard-earned savings without reference to you? Even if you trust them, what influence might they fall under from others? Similar questions do of course arise in relation to marriage where the solution may lie in a prenup agreement. Fortunately, in the case of property, a relatively easy solution is at hand in the form of a legal charge. While the parents may give part of the cost of the property to the son or daughter outright some or all of the funds can be provided, at least initially, by way of a loan. A loan does not necessarily have to bear interest, and probably would not do so in these circumstances. Over time the loan can be reduced or written off by further gifts from the parent. The existence of the loan will be noted on the legal title to the property making it impossible for the property to be sold or charged further without the consent of the parent.
An alternative might be for the parent themselves to purchase the property. Except where the children are very young this is unlikely to be so attractive. Any increase in value of the property belongs to the parent and is liable to CGT and/or IHT accordingly, and the parent is almost certainly going to have to pay the SDLT surcharge of 5% payable on the acquisition of second homes. While full control is retained and you will have succeeded in providing a home for your offspring you will not really have helped them to progress onto the property ladder.
Financing the Purchase
If your son or daughter has reached the stage where they are able to obtain a mortgage themselves then clearly it may make sense for them to do so. However, that is not easy for those who have only recently joined the labour market and is much more difficult for them than it was for previous generations. While mortgage companies are not supposed to take into account student debt when assessing eligibility for a mortgage, it is hard to see how they can ignore it and in most cases it seems that they do not. Consequently, anyone who has not been working for several years is going to find it difficult to get a mortgage and even when they do it may not go very far towards financing the purchase of the property, particularly if it is in London.
So how else might it be financed if borrowing is required? One solution may be for the parent to take out or increase the mortgage on their own property and then lend the money, back-to-back, to their son or daughter with or without an interest charge. While this may not be very tax efficient (the interest charges will bear income tax for the parent) it may be a convenient and possibly less expensive way of borrowing money. An alternative may be for the parent to be a co-borrower or guarantor but that is not as easy to organise as it once was.
Minors
What if your son or daughter (or one or more of them) is under 18, the legal age at which they can own property in their own name? Normally a parent or someone else will stand in for them as “bare trustee”, that is they hold the property as nominee for the minor and once the minor reaches 18 he or she can ask the trustee to transfer title to him or her. This may be the situation if, for example, the child has received an inheritance so has the funds but not the legal capacity to purchase a property. In itself this does not cause a problem were it not for a quirk in the SDLT legislation relating to the 5% surcharge. This states that if a property is purchased on behalf of a minor it will be considered for the purpose of SDLT to be acquired by the parent of that minor. That means that if the parent already owns another residential property anywhere in the world (which is very likely) the purchase will be treated as a purchase of a second home for SDLT purposes, and the 5% surcharge will be payable even though the minor does not have any other property held for them. In other words, an 18-year-old can benefit from not having to pay the 5% surcharge while a minor never can. With the correct structuring it may be possible to avoid this charge particularly if at least one of the children has already reached 18 by the use of legal charges. Alternatively, it may be best to wait until one or all of the children for whom the property is being purchased have reached 18.
Inheritance Tax Considerations
Any gift from parent to child is potentially subject to Inheritance Tax (IHT). Once the personal allowance (currently £325,000) has been used up, tax is charged on death at the rate of 40% with gifts made in the preceding seven-year period being brought into consideration. It is therefore quite easy to avoid the charge if gifts are made seven years or more before death, known as a Potentially Exempt Transfer (PET). The trick therefore is not to leave it too late; the later you leave it to pass on assets the greater the risk of a charge. In the context of assisting children with their first property purchase there should therefore be a good chance of avoiding IHT entirely, given that parents are likely to be in their 50s or 60s when the issue arises. It is also possible to take out life insurance which will pay the tax in the event of the donor’s death within the seven year period. Do, however, bear in mind that different IHT rules apply for those who are not UK domiciled and that the law in this area is currently changing.
Children who become the owners of property (or have other assets) should also make a will. There are many reasons why it is always a good idea to have a will but one of them is that it will prevent the deceased’s assets passing back to the parents on death, which is what happens if there is no will. It may be better for them to pass to a surviving sibling (note, different rules apply if the deceased is married).
A few final points
As said above there is no one-size-fits-all solution but here are a few points worth considering:
- A gift to your child in their late 20s to help them get onto the property ladder may have more long-term benefits than a larger gift to them at a later date.
- Plan for grandparents to skip a generation when deciding on who will inherit. There is less chance of a charge to IHT if money is passed from grandparent to grandchild rather than via a parent. And, sadly, the timing of a grandparent’s death may be at a time when a grandchild is ready to step onto the property ladder for the first time.
- Early gifts are more likely to be successful in saving IHT.
- You can’t take it with you!
- And, finally, you probably don’t want your children still living with you when they are in their 30s!
