Helping your children get on the property ladder
Helping your children get on the property ladder.
We’ve all heard about the Bank of Mum & Dad and recent data shows that if all of the loans parents provide for children to help them buy a property were added up, they’d be the 10th biggest lender in the UK.
However, whilst parents and grandparents who wish to help their children or grandchildren get onto the property ladder, it’s important they think through their options very carefully.
Perhaps the easiest of the options to deal with is where the parent wishes to gift the deposit to help with the house purchase. This is a simple gift from one to the other without the need for any formality.
However, should the parents wish to provide a home for the child, that puts a completely different complexion on things.
Putting the title into the child’s name
If the title to the property is taken in the child’s name, the child becomes the owner of the property and can do with it what they want. That means, the child can take out a mortgage over the property or sell the property and keep the proceeds of sale. If the child were to run into financial trouble and become bankrupt, that would likely lead to the sale of the property to satisfy their debts.
If the child is married or in a civil partnership and it failed, most likely the spouse or partner would make a claim for a share in the value of the property.
It is also very important to be aware that if the child is under 16 years of age, even if the title is taken in the child’s name, the purchase will be considered to be an additional dwelling of the parents for Land & Buildings Transaction Tax purposes. That means the Additional Dwelling Supplement of 4% of the price will apply to the purchase (provided the purchase price is in excess of £40,000). This, of course, is in addition to any normal Land & Buildings Transaction Tax that may apply in the purchase.
All of this means that the parents or grandparents need to think long and hard before simply putting the title to the property into the child’s name.
What are the options?
There is always the option of the parents buying the property in their own name, with or without a loan. They can then allow the child to live in it. This means that the property would always belong to the parents so the risks we’ve highlighted if the title to the property were to be placed in the name of the child simply don’t apply.
However, on the purchase, the Additional Dwelling Supplement would apply if the parents already owned their own home and, on disposal, there is the potential for a Capital Gains Tax charge.
However, if the parents were to die and there are other siblings, then it might be that those siblings would insist on the sale of the property to meet their share in the parent’s estate.
So, even if the property is bought in the name of the parents, some problems still persist.
Taking a security over the property
One way of securing the investment if the title is taken in the name of the child is to take a Standard Security over the property. This is usually backed up by a Minute of Agreement setting out the circumstances where any money secured must be repaid. What this does mean is that if the property is to be sold, provided the sale price is in excess of the money lent, the initial investment (and, hopefully, some notional interest) will be repaid. However, the parent won’t share in any profit made on the sale.
The child might well run into the same problems as we’ve already described, but by taking a security over the property, at least the initial investment is protected.
Putting the property in trust
Creating a trust adds another level of complexity when trying to help a child get onto the property ladder. Basically, a trust is created with the parents as trustees and the child as the beneficiary. The trust then buys a property for the child to live in. Because the property is owned by the trust, it’s sheltered from the child’s bankruptcy or divorce and the child can’t borrow to raise money from it. The child’s creditors can’t access the property because the child doesn’t own it.
If the child needs to move to another location, the trust can sell the property and buy another property and allow the child to live in it. The trust may also ultimately transfer ownership of the property to the child or sell the property and pass on the free proceeds to the child.
As with some of the other options, the Additional Dwelling Supplement of 4% of the purchase price (in addition to any normal Land & Buildings Transaction Tax) will need to be paid. On disposal, Capital Gains Tax may apply. These taxation implications are beyond the scope of this article, but if you are interested in how Capital Gains Tax might apply, you can visit the government’s website on Trusts and Capital Gains by clicking here.
One final (and very important) aspect of creating a trust is that once the money is put into it to allow the purchase of the property, that money no longer forms part of the parent’s estate and, as such, is sheltered from Inheritance Tax. To make sure this is done correctly, you need to take proper legal advice.
Everyone’s situation is different. If you’d like to help a child or grandchild get onto the property ladder, please get in touch to discuss your options in detail.