The data for first-time buyers is increasingly showing that many are receiving assistance from their parents to enable them to get on to the property ladder. This is commonly known as assistance from the ‘bank of Mum and Dad’ and can take the form of either a gift or a loan.  When parents are contemplating helping their children there are many practical issues to consider, from the tax implications of giving money to your children to what happens if your child is unable to pay back a loan. 

Loan or gift?

Disputes can occur if there is no clear understanding as to whether the assistance is being given by way of a loan or a gift.  If it is to be a loan, writing the terms of that loan can save a lot of heartache and difficulties later on.  Good record keeping may also help with future tax issues, as well as avoiding arguments and misunderstandings. A Declaration of Trust should be considered.

Parents should also consider very carefully the implications of reducing their own resources, which they may need for costs which arrive later in life once they have retired. 

Any assistance given - whether by way of gift or loan - will need to be disclosed to, and agreed by, the mortgage company or bank lending on the purchase.

Tax issues

There are several potential tax issues to be considered before deciding to give support for a house purchase. These include Inheritance Tax, additional Stamp Duty Land Tax liabilities on second homes, Income Tax if parents are receiving interest on the monies lent, and Capital Gains Tax if the support from the parent is in exchange for taking a share in the property. 

Other ways parents can help

Parents, in addition to making a loan or a gift, could provide assistance by contributing to a lifetime ISA opened in the child’s name, obtaining funds to assist through equity release mortgages, taking out a second mortgage or possibly acting as a guarantor on their child’s mortgage.

Conclusion

The current combination of high house prices, high student debt and a challenging job market makes it increasingly difficult for young people to get onto the housing ladder.  Whilst parents may wish to assist their children, careful consideration of all the circumstances surrounding that assistance should be given before final decisions are made.  By thinking matters through clearly and documenting arrangements put in place, many difficulties and misunderstandings can be limited. 

We can assist if you are unsure as to what considerations you should be making, whether you are buying a house with or without help from mum and dad, tax planning, as well as putting together a Declaration of Trust.

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