The so-called Bank of Mum and Dad is now the ninth biggest lender in the UK! As house prices continue to outpace incomes, young homebuyers increasingly need parental backing to get on the property ladder, according to recent research from a major lender.
Parents are predicted to lend more than £6.5 billion to new home buyers in 2017, £1.5 billion more than 2016, funding deposits for almost 300,000 mortgages. That amounts to more than a quarter of all property purchases in the market, and shows how tough it is for young adults in their 20s and 30s to buy their first property or upgrade a family home.
But while the Bank of Mum and Dad may be happy to help, it also has to exercise caution.
One third of all parents are worried about gifting cash or assets to their children because of concerns about marriages and relationships breaking down, according to another report this year. This helps to explain the growing preference for lending to children, rather than gifting, to help them buy properties.
There is also now a major disadvantage in parents taking a beneficial share in their child’s property. In April last year second home owners were hit with the new 3% stamp duty levy on any asset worth more than £40,000. So if the parents already own their own or another property, taking a share worth £40,000 or more renders the full value of new property subject to an extra 3% tax charge.
But there are also serious implications in lending to family members, especially if the intention is that those monies are to be protected and repaid at some stage in the future, perhaps in time for the parents’ retirement.
The divorce rate may be at its lowest level in 40 years but one in 10 marriages still ends in divorce. In cases where monies are loaned to a couple, in the event of a divorce the court will usually treat inter-family debt as a soft loan, meaning it is unlikely to be recovered.
So married couples relying on parents for financial support should take legal advice and have either a living together or marital agreement drawn up, to protect their parents’ contributions in the event of separation.
Formal legal agreements, such as pre or post nuptial agreements, are now key to safeguarding family assets. Our family team deals with these on a regular basis and can liaise with our private client lawyers where appropriate on tax advice and any consequences for wills and family trusts.
If protected through an agreement, gifts have the great advantage over loans that they are effective for inheritance tax, becoming free of tax if the parent lives for seven years after making the gift.
A final option is that parents can request that a trust deed is drawn up - although they need to check how this might impact upon any mortgage lender’s terms. Many lenders require parents to sign a document to state that the money is an absolute gift, before they will issue a formal mortgage offer, in order to be satisfied that they will have no claim against the property if it is repossessed. In some cases lenders will relent, if it is a genuine loan that needs repaying, providing the lender has sufficient security. This can need perseverance, to get from the branch office to a more senior person in a regional office with the authority to make such a decision.
A trust deed might mean a gift by the parents, making it effective for tax purposes, to meet the needs of one child now and potentially of other children later, with a share of the property kept separate for now. We can advise on all the tax aspects of this, how it might save any CGT problem, and the flexible options for the future, including the power to transfer value from the trust to the child concerned when the time is right.
So parents who do want to help but are wary about their child’s marriage or relationships have several options to consider. We can help make sense of all this, bringing reassurance that assets helping make a great new home are also safe.
Kelly Greig, Partner
Published: 11 May 2017
A moment of clarity
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