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Bank of Mum and Dad – key legal and tax issues helping family get started on the housing ladder

The BOMAD (Bank of Mum and Dad) is the UK’s 9th biggest lender, with thousands of young adults needing help from a family source to even get started with their first home. Whether the ‘lender’ or ‘provider of finance’ is a parent, grandparent or aunt/uncle, there are key issues that need to be considered.

Is it a loan, a gift or what?

There are three ways that help is commonly given in these situations:

  • A loan – to be paid back eventually
  • A one off gift
  • Buying a share of the property.

In practice buying a share of the property has been largely shut off with the additional 3% Stamp Duty Land Tax (SDLT) charge when a purchase involves someone who already owns a home, making this option a costly one (e.g. Buying a £300,000 house costs an extra £9,000).

So, is it a gift or a loan? 

Assuming parents can afford to make an outright gift, and don’t need the money repaid later (say) for their own retirement, they should consider fairness to the rest of the family. Can parents afford to gift a similar amount to the other children later? If not, Wills or trusts may need amendment, so that balancing payments can be made – with care taken over the impact of tax, as lifetime gifts claim the Inheritance Tax (IHT) allowance (the Nil Rate Band) ahead of the estate on death.

Protecting the money gifted (or lent) from claims if the relationship goes wrong?

The main problem preventing many parents simply gifting money to children, is fear that it’s simply lost in a divorce if everything goes wrong. Research suggests many parents (one third) won’t help their children for this very reason. It also points to a loan being better for many than a gift.

Three issues to consider:

  • The lender’s requirements, if there is a mortgage: Any bank or building society will want to ensure that no-one else has an interest in a property, and that there is no other claim on the “equity” in the property, so will normally ask for a form to be signed confirming that any money received was a gift and not a loan. If this is done, it is hard then to claim later that this was really a loan.
  • A pre or post-nuptial agreement: This is a very sensible, practical answer, which can work as the English courts effectively recognise pre-nups and post nups, and will normally take them into account in the event of a divorce. There are two provisos, first that the agreement is made after each party has had independent legal advice, based on full disclosure of financial facts by each party. Second, fairness - no agreement can override a claim by a child of the marriage, and it cannot leave one party in a situation of real need.
  • What about using a trust? Some may wish to consider a gift to a trust, which then either owns the property, if the whole thing is bought, or a share in it, or makes a loan. Apart from the same lender issues as with lender requirements above, two issues need addressing. First the 3% extra SDLT charge applies to most trusts, though in some cases careful planning might make a work around possible. Second, the problem will come on a divorce, whether the divorce court simply looks through the trust, assumes the full value is available to the child and makes an order allowing for that resource. Trusts are increasingly vulnerable on divorce, though depending on the full circumstances and the detailed documentation, a little protection may be possible.

A simple declaration of trust, of different property shares reflecting contributions made, is of limited value – often gets overlooked later and is essentially irrelevant as between married couples. Other tax issues arising include IHT (it’s good to set the “seven year clock”, for surviving a lifetime gift, running, but take care on details) and Capital Gains Tax (CGT – care with the main residence exemption).

Read more about Irwin Mitchell's expertise in Tax Planning.