Helping a son or daughter onto the property ladder – avoiding the pitfalls
The financial struggles faced by young people trying to get onto the housing ladder regularly grab media headlines, and increasingly parents and grandparents are keen to help out. However, it’s important to get some good professional advice before proceeding.
Stamp duty changes
Getting onto the first rung of the housing ladder has just become more affordable, thanks to the recent change in stamp duty land tax. This has been scrapped for first-time buyers on property purchases up to £300,000.
However, if you decide to step in and help your children, then you need to make sure you don’t inadvertently land yourself with a stamp duty bill. Helping out a child with the deposit on a property is not a problem, but part-owning it is. If parents buy a property for their child and are named on the deeds while already owning a home, they will be liable to stamp duty at the additional rate. If you have a main residence, then any other property purchase – such as a property owned with a family member – counts as a second home.
Protecting a parent’s interest
The family can simply give the cash for the deposit. The larger the deposit the would-be house buyer has available, the greater the likelihood of being offered a better mortgage rate. Each parent can gift up to £3,000 in each tax year (in total, not per recipient) exempt from Inheritance Tax, and if you haven’t used last year’s allowance, then each parent can gift £6,000 this year.
If you don’t want to simply give them the money outright, one of the best ways to protect money that you give to a son or daughter for a deposit on a property is to set up a loan and draw up a repayment schedule, formalising the arrangement via a ‘promissory’ note. This way you can loan them the money and charge interest each month.
Alternatively, if the son or daughter is buying a property in joint names with another person, then the parents’ deposit can be protected by creating a declaration of trust that fixes the shares that each co-owner will have in the property in the event that it’s sold. The declaration can contain the stipulation that after the bank or building society is paid off, then the deposit belongs to the son or daughter or parent, rather than being split with the joint owner.
Parents are often prepared to act as a guarantor for their child’s mortgage. However, it’s important to remember that when you become a mortgage guarantor, you effectively take on responsibility for someone else’s mortgage. Most guarantor loans or mortgages will require you to repay the entire amount should the original borrower be unable to pay. So, mercenary as it may sound, parents will need to consider whether their son or daughter represents a good risk, and will be in a position to keep up mortgage repayments at all times.
When it comes to giving or lending money to family members, you can pass on money in a variety of ways, but you need to make sure you don’t fall foul of the Inheritance Tax rules in the process, so advice is essential.
Here to help
Our Conveyancing team are on hand to answer any questions you may have. Please call us on 0330 221 8855, or contact us online.