The Bank of Mum and Dad

31st January 2024

The ‘Bank of Mum and Dad’ is set to gift more than £25 billion by 2024, supporting almost half of all first-time buyer transactions. Grandparents are providing support too, with one in four grandparents helping or planning to help grandchildren purchase their first home. As well as helping children to get onto an increasingly expensive housing ladder, such gifts can also be means to reduce inheritance tax liability.

If gifting your child a deposit to purchase their first home is something you are considering, here are some of the factors you need to bear in mind when making your decision.

Is the money a gift or a loan?

If the money is gifted, you cannot ask for it back. The gift becomes the property of the child to use as they wish. There is always therefore a risk that the monies may not be used for the intended purpose. Important to bear in mind too that a gifted deposit could be subject to Inheritance Tax (IHT) if you die within seven years of the date of making the gift.

A loan would give you more control, and the certainty that the money will be paid back to you. However, if you elected to charge interest on the loan, this would form part of your income and you would pay tax on this. A loan can also make it more challenging for your child to obtain a mortgage as many mortgage lenders will not accept loaned deposits, only gifted ones.

It is important to ensure that whatever form the financial assistance takes, it is recorded in writing between the parties to avoid future family disagreements and possibly litigation.

Is your child buying on their own or with a partner?

If your child is purchasing with their partner, you need to consider how to protect the gift if the relationship were to break down to prevent the partner from claiming any part of the gift.

To protect the money you have gifted to your child, a declaration of trust or trust deed should be prepared. The declaration will specify who is entitled to receive the gifted deposit in circumstances where the property is sold. An alternative option would be a co-habitation or living together agreement which would contain a record of all financial contributions and what would happen if the relationship ended.

How would it affect your own financial security?

Before making any gift, you need to assess your own finances carefully and understand whether you can really afford it. Would the gift compromise your current quality of life? Do you have sufficient savings for unforeseen circumstances? Can you afford your current lifestyle in retirement? Taking advice from an experienced financial advisor may help with this.

Other options to help your children get onto the property ladder

You may decide gifting or loaning a large sum of money is not an option. If that is the case, there are other ways to support your child to get onto the property ladder.

Choosing a family offset mortgage

Your savings would be used to form part of the deposit. However, there will be requirements for your monies to remain with the lender for a period of time (usually not less than 3-5 years).

Acting as a guarantor

In this scenario you would guarantee the terms of your child’s mortgage. If your child defaults on the terms of their mortgage the lender can pursue them and you to recover any outstanding sums.

Releasing your equity

You might be able to use part of the equity in your home to provide additional security against your child’s mortgage.

Taking out the mortgage jointly with your child

This option could certainly help if your child was struggling to meet the affordability criteria of their lender. However, you would need to consider the tax implications before proceeding. If you already own a property, buying a property with your child is likely to mean the transaction will attract the higher stamp duty land tax rate. (On the other hand, if your child was buying on their own, they might be eligible for the first time buyer rate). If you own your own home, then your child’s home would be classed as a second property and may be subject to capital gains tax.

As always, careful thinking and sound advice from the experts can give you the insights you need to understand your options and make the right choice for you and your children.

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