Being the Bank of Mum and Dad

In the past year, almost 25% of home purchases were funded by the “Bank of Mum and Dad”. And according to a recent Legal & General study, last year more than 50% of homes bought by the under 35s involved gifts from parents, grandparents, other close family or friends.

Even though government Help to Buy schemes help fund deposits, there’s still a shortfall for many who are anxious to buy. So, reliance on the Bank of Mum and Dad is unlikely to end anytime soon.

Implications

It’s natural for parents to want to help their children financially if they can. But there are legal and tax consequences, depending on how you arrange the transaction.

Everyone involved must understand how the arrangement works. Is the money a loan or an outright gift? Or are the parents investing in a property?

Outright Gift

You make an outright gift without any chance of getting it back. Usually, it’s done informally, but it’s best to keep a record. Also, high street mortgage lenders often ask for formal acknowledgement that a gift is just that. In the context of inheritance tax (IHT), a key advantage is that making an outright gift reduces the value of your estate.

Co-ownership – You & Your Child

You may prefer to make an investment rather than a gift or loan. But remember, if your investment does well, you will be increasing, not decreasing, the value of your estate for IHT purposes.

On a practical level, the property you invest in may end up becoming your child’s long-term home, so everyone needs to understand what this means. A formal agreement, such as a ‘Declaration of Trust‘, which records the contributions everyone makes, will reduce the possibility of a family dispute down the line.

Co-ownership – Your Child & Others

If you’re helping your child to buy a property with someone else, then a Declaration of Trust/Co-ownership Agreement will record and protect your child’s interest and help to avoid a dispute later on.

Loans

Unlike an outright gift, a loan gives parents the option to get their money back and access to the funds should they need it in the future. It can help to protect their child (and their cash) in the event of a third-party claim or relationship breakdown.

Remember if a mortgage lender is involved, it’s vital to make sure the lender agrees to a third-party loan rather than a gift.

Draw up a legal agreement, even if that seems a little too formal. Disputes in families aren’t rare, especially when third parties or cash is involved. It’s pretty common to take some security for the loan, using a legal charge over a property your child is buying.

There are IHT implications. So, it’s best to take specialist tax and legal advice to minimise your exposure to tax.

Trusts

Depending on your circumstances, setting up a family trust may give you some control and enable you to provide for your children or other intended beneficiaries in a measured way. However, expert legal and financial advice is essential when considering how to structure the trust, including gifts into trust and loans from the trust.

Inheritance

Inheritance is often the trigger for parents to think about helping their children. Depending on the situation, a ‘deed of variation’ may transfer your inheritance to your child.

Our Advice

Even if the family is close and you think the likelihood of falling out is remote, make sure you formally document the arrangement. Whatever you decide, you should balance your needs, those of your children, and keep an eye on tax efficiency and asset protection.

For further information or advice, please contact us. We’re here to help.

Please note that all views, comments or opinions expressed are for information only and do not constitute and should not be interpreted as being comprehensive or as giving legal advice. No one should seek to rely or act upon, or refrain from acting upon, the views, comments or opinions expressed herein without first obtaining specialist, professional or independent advice. While every effort has been made to ensure accuracy, Curtis Parkinson cannot be held liable for any errors, omissions or inaccuracies.