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The Bank of Mum and Dad: How can I help my child to buy a property?

With the average house price now being seven times an annual salary, it continues to become more difficult for first-time buyers to buy a property without help from parents or other relatives.

If it were a mortgage lender, the Bank of Mum and Dad would be the ninth biggest lender, with 84% of parents helping their children to buy a property. According to the latest research, the Bank of Mum and Dad is expected to support almost half of all first-time buyers with gifts and loans worth £25 billion over the next three years.

Although we call it the Bank of Mum and Dad, not only parents are helping their children. Research from Aviva shows a growing trend towards grandparents helping out with house buying too.

Parents and grandparents can help the younger generation with buying a property in several ways, each of which has benefits and legal risks. A good conveyancing solicitor will be able to explain the legal risks involved.

Giving money to your child to buy a property

How can I help my child to buy a property?

The easiest way to help your son or daughter is simply to give them the money. This is known as a gift.

Unlike loans, mortgage lenders will generally be happy for parents or other relatives to gift money to buyers, because it means the donor will not have a legal interest in the property being bought. However, the lender (via your conveyancing solicitor) will want to see a signed declaration (also known as a deed of gift) from you that the money is a gift and that you do not expect it to be paid back. Your lender will also require a declaration of solvency to be completed to confirm that you are solvent at the time of making the gift and that no creditors are expected to pursue your child for the money you are gifting. Your conveyancing solicitor will draft the declaration of solvency and the declaration of gift.

You have an annual exemption of £3,000, which means that you can give up to £3,000 in one year to your son or daughter without tax being payable. If you do not use your annual exemption in one year, HMRC allows you to roll it over to the next year, so you could give as much as £6,000 as a gift tax-free. However, an annual exemption can only be rolled over once.

For you, a gift is also a good way to pass your money to your children and reduce your inheritance tax bill. However, you will need to make sure you live for at least seven years after making the gift. If you pass away within seven years, then the gift will still be considered part of your estate when the inheritance tax is calculated. You should obtain tax advice before proceeding with any gifts. Your conveyancing lawyer is unlikely to be an expert in this area of tax law. You should contact a probate solicitor, a tax lawyer or an accountant for tax advice.

The other risk with a gift occurs if your child later breaks up with the partner with whom they bought the property. The ex-partner may be able to claim half of the gift, on the basis that the money was given to both jointly.

To protect your child in case their relationship breaks down, you can request that a declaration of trust or a deed of trust be drawn up by a conveyancing solicitor at the time of making the gift. This should state that money has been given to your child only.

If your child and their partner are not married, it is easier for them to split up without having to go through the legal process of a divorce. It may be a good idea for a Living Together Agreement (also known as a Cohabitation Agreement) in the form of a deed to be drawn up so that details of all financial contributions can be recorded and how the money will be divided in case the relationship comes to an end.

Lending money to your child to buy a property

An alternative to gifting money to your child is to lend them money. The advantage to you of course is that you will receive the money back.

Lenders, however, are often not keen on loans from parents to help buy a property, as it means the borrower will have additional debt and you may obtain an interest in the property being bought. If your child is unable to keep up the mortgage payments and the lender repossesses the property, they must make sure that the money you lent and any other creditors are paid back from the net (i.e., after the lender’s money and all expenses) sale proceeds on a pro-rata basis.

Also, with a loan, the money is technically still part of your estate, which will affect the amount of inheritance tax payable when you die. It does not matter if you live more than seven years after giving the loan. The only way you can avoid inheritance tax being paid concerning the loan is if you later choose to dismiss the loan, thereby turning the loan into a gift.

It is up to you whether you charge your child interest on the loan. If you do, the interest payments will be considered a part of your income and you will have to pay income tax on it. If you are lending money to fund someone’s purchase, it is good practice to enter into a secured loan agreement and have it registered against the property as a secured charge.

If you are planning to make a loan, ensure that your child has obtained consent from the lender and that the conveyancing solicitor is informed of this upfront.

Other ways to help your child buy a property

Even if you do not have the cash to help your child, there are other ways in which you can help them buy a property.

Equity as security

If you own your home, then you may be able to use it as additional security against a mortgage, depending on how much of your mortgage you have already paid off. This is particularly useful if your child and their partner are unable to obtain a mortgage that is big enough to help buy the property they want.

The big risk with using your own home as security against your child’s mortgage is that, if they are unable to keep up the repayments on the mortgage, you could lose your home.

Family Offset Mortgages

If you have savings, instead of giving a loan or a gift to your child, the savings could be used as security against a mortgage. This is known as a family offset mortgage and can help to reduce the interest that your child pays. The main disadvantage of a family offset mortgage is that you cannot access your savings for the term of the mortgage (usually around 25 years) or until it is paid off. So, if you think you will need to use the savings before that, then a family offset mortgage may not be right for you.

Guarantor mortgages

A less common option is for the parent or a relative to guarantee 100% of the mortgage debt. This means that, if your child is unable to keep up repayments on the mortgage, you become responsible for paying the mortgage. As with putting up your savings or the equity in your home as security, the big risk is that you could end up losing your savings or your home.

Buying a property with your child

If you and your child agree to buy a property jointly and obtain a joint mortgage, then your combined incomes would help them to obtain a bigger mortgage.

However, if you already own your home, then this new property will count as a second home. Not only will your child be unable to take advantage of options available to first-time buyers but the property will also be subject to the additional stamp duty rate of 3%, thereby pushing up the cost of buying the property.

On top of that, if the property is a second home, then capital gains tax may have to be paid on the increase in value if the property is sold in the future. You may be able to sidestep this if your child’s lender allows for a joint mortgage without your name being added to the title deeds. This is known as a joint borrower, sole proprietor mortgage. It is a mortgage where your child can add your income onto their mortgage application to help increase their affordability.

Source of wealth on gifts and loans from parents and others

It is important to remember that conveyancing solicitors and lawyers are required to conduct anti-money laundering checks on any person giving or loaning monies, irrespective of the amount of money involved. What may vary is the depth of the checks. There are two limbs to the checks. Firstly, the rules require your conveyancer to conduct Know Your Client (KYC) checks, which will require identity documents to identify the persons involved. This usually requires a valid passport or driving licence and for proof of address, a utility bill or bank statement from within the last three months to be provided. These documents will be used to run an electronic identity check against numerous databases within the UK and international databases to verify your identity. Secondly, the conveyancer is required to conduct a source of wealth check on each of the persons involved. The source of wealth check in conveyancing has become intrusive, complicated, and time-consuming due to the requirements of the regulators that govern the conveyancing sector. This is also because conveyancing has large amounts of money changing hands regularly, which increases the risk of money laundering.

Your conveyancing solicitor would usually require six months of bank statements and payslips and other documents to help establish a link between the monies involved and the legitimate source of the funds.

House buying is becoming more expensive, and more people are having to rely on help from the Bank of Mum and Dad. The friendly and expert team of conveyancing solicitors and lawyers at Phew Conveyancing will be able to advise you on the legal risks, to enable you to make an informed decision.

Example of a Declaration of a Gift (Deed of Gift) and Declaration of Solvency

DEED OF GIFT and DECLARATION OF SOLVENCY

Mortgage account number:

Name of borrower(s):

Name of donor(s):

Amount of gift: £

Property to be purchased: 

—————————————————————————————————————–

We,John Smith of 1 Acacia Avenue, London SE25 3RR and Joe Smith of

18 Bishops Street, London SW34 3EE confirm that we have gifted the sum of £…………………….

to our son to help him towards his purchase of 1 John Road, London, E28 1PP.

We understand that he is purchasing with a mortgage from Coventry Building Society.

We confirm that:

  1. the gift is not refundable, and
  2. that we will have no interest whatsoever in the property he is purchasing, whether legal, beneficial or financial, and
  3. that we do not intend to reside at the property at any time after completion (but limited to the duration of the mortgage), and
  4. that we are fully solvent, and
  5. that we are not aware of any circumstances that could lead to bankruptcy proceedings being brought against us, nor of any pending proceedings against us which might lead to an act of bankruptcy, and
  6. that this transfer is not being made to avoid any creditors.

STATEMENT OF TRUTH

We believe the statements above to be true.

Signed:…………………………………………            Dated: ……………………………

Name: John Smith

Signed:…………………………………………            Dated: ……………………………

Name: Joe Smith

Please note that nothing on this page may be taken as providing you with legal advice. You must contact a solicitor or conveyancer to obtain advice specific to your needs and circumstances. The information is correct at the time of publication.

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