29 March 2018

The bank of mum and dad

by Miranda Marshall, Director, Hayes + Storr

‘The Bank of Mum and Dad’ is the 9th biggest mortgage lender in the country. It is estimated to have lent £6.5 billion in 2017.

Parents who help children to buy their first home should be aware of all sorts of repercussions.

An outright gift with no-strings is the easiest, but the question of how one is to be fair to all your children needs careful handling. Your Will may need altering.

Another option is a loan; but is it really to be repaid, and, if so, on what terms? Is interest to be charged? Any commercial mortgage company also lending will insist on having priority to your loan.

Another possibility is that the parents take a share in the home, even if they are not registered as legal owners. Their interest can be evidenced by a deed called a Declaration of Trust.

The recently toughened-up Stamp Duty Land Tax (SDLT) is now an important consideration, as an extra 3% higher rate is charged additionally on a second home, or an interest in it. To limit SDLT a gift or loan is better than an equity share.

Many parents are concerned about their child’s marriage or relationship and that the money given might be lost in a messy divorce/break-up. Retaining a loan/share of equity could protect the funds given or lent. A 2017 report showed that the reason why 1 in 3 parents were unwilling to provide support to married children was due to concerns about the children’s spouse.

This worry can be protected against by the recipient-child entering into a pre-nuptial or cohabitation agreement. Such lack of trust in a family is difficult to bring up in conversation, so it may be easier for the solicitor to raise the safeguard of a pre-nuptial agreement (or be blamed for doing so) to maintain a happy family. A pre-nup could perhaps be a prerequisite of the gift. If the child is already married a post-nuptial agreement (post-nup) can achieve the same result.

If the loan is never intended to be repaid, this route can be good asset protection, but bad tax-planning.  The advantage of a gift is that it sets the ‘7-year clock’ running for Inheritance Tax (“IHT”). For Capital Gains Tax the child will get full main residence relief if they own the whole property, whether funded by a gift or a loan.  If the parent holds a share of the house, they will have to pay full CGT on their share if they later sell or give it.

Helping a child buy their first home remains a useful way of passing on family wealth. A trust can work well. You might consider a revocable interest. Trusts are not just used for tax mitigation and are a useful asset protection tool also.

A loan can be written off in stages to use up annual IHT gifting allowances. This release should be done by a deed.  The loan could be repaid over the years in lieu of paying mortgage-interest. This is a good way to teach financial discipline; rather than the child being given too much too young.

The important thing is to talk it through with a solicitor, as your trusted advisor, so that you can establish your priorities and they can help you structure the arrangements in the best way to suit you and your family.

This article aims to supply general information, but it is not intended to constitute advice. Every effort is made to ensure that the law referred to is correct at the date of publication and to avoid any statement which may mislead. However no duty of care is assumed to any person and no liability is accepted for any omission or inaccuracy. Always seek our specific advice.

If you would like further advice on this matter please contact Miranda on 01328 710210. If you require advice on any other legal matter call 01328 863231 or email law@hayes-storr.com.

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