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International trusts, tax and estate planning & Private Equity & Private Wealth & Tax & Estate Planning & UK trusts, tax and estate planning & UK/USA Tax & estate planning
2 minute read
11 October 2021
The Bank of Mum and Dad supported more than half of first-time buyers under the age of 35 in 2020 and is the sixth largest lender in the UK.
The average amount provided by the Bank of Mum and Dad in 2020 was around £20,000. As a first step, you therefore should ensure you are comfortable that you can afford to provide this level of financial support to your children and that you will not need the funds to supplement your income in retirement.
If you are happy, there are three principal ways parents can provide their children with funds to help them buy a house: outright gifts, trusts, and loans.
The principal tax to consider when making gifts is inheritance tax (IHT). You can give away up to £3,000 each per year tax-free (£6,000 if you haven’t made any gifts in the previous tax year). You can also make a tax-free gift to a child of up to £5,000 in the year in which they get married.
Larger gifts will be ‘potentially exempt transfers’, commonly referred to as ‘seven-year rule’ gifts. If you survive the gift for seven years, it will fall out of account for IHT but if you were to die within the seven years, the gift will be taxable at 40% (with the potential tax liability tapering down after three years).
You should formally document any substantial gifts in a letter or deed of gift so that there is a record for future reference (a mortgage company may also require evidence of the gift). If your child will be purchasing the property with a partner, you may also consider a cohabitation agreement to determine how the property will be divided if their relationship ends.
As further security, you may wish to put the money into a trust (of which you can be the trustees). These days, the principal benefit of trusts is asset protection, rather than tax mitigation. A trust may be especially useful, therefore, if you have any concerns about how your children might manage the money if it is not immediately invested in a house.
Provided you do not put any more than your tax-free allowance for IHT, or ‘nil rate band’ (currently £325,000 each) into trust, there will be no immediate IHT implications of doing so, apart from starting the seven-year clock running to remove the funds from your estates. As trustees, you can continue to control the funds until such time as your children are ready to purchase a property.
The taxation of trusts is a complex area and there will be administration and set up costs to consider. We would always suggest you take legal advice before going down this route.
An alternative might be to loan the money to your children. This will not reduce your IHT bill (as the loan will instead be an asset in your estates) but does offer a little more control than an outright gift. You should be aware that a loaned deposit may restrict the availability of certain mortgages.
If you later choose to waive repayment of the loan, you will make a gift of the outstanding balance at that point, which will be subject to the seven-year rule for IHT. As with gifts, any loans should be formally documented.
While not common, there are some mortgage products that might be of assistance, although they are not without their drawbacks
Family Offset mortgages allow for parental savings to be offset against your child’s mortgage debt, reducing their interest payments and making the mortgage more affordable for them. The downside to this is that you will lose access to your savings and will not earn interest while the arrangement is continuing
Guarantor mortgages are another option that allows parents to stand as guarantor for their child’s full mortgage debt, offering their own savings or home as security for their child’s mortgage payments.
You could also buy jointly and/or take out a joint mortgage with your child so that your combined incomes enable them to access a larger loan, albeit you will be equally liable for the repayments.
However, there are some potentially significant tax downsides to this. If you are named as a purchaser and already own a property, you and your children will almost certainly pay an additional 3% in stamp duty. You may also be liable for capital gains tax on your share when the property is sold.
This article is part of a series of lifetime giving articles. Read about charitable giving here.
11 October 2021
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