Understanding the Bank of Mum and Dad

Recent reports have suggested that many first-time buyers receive significant support from the Bank of Mum and Dad, with an average contribution of £18,000. While this may solve the problem of finding the deposit to allow first time buyers to take their first step on the property ladder, it can create other issues.

Parents may help out in many ways from providing a few thousand pounds right the way up to gifting an entire house. Whatever the level of contribution, there are some things which should be considered.

Has the contribution been mentioned in the Will?

If you would like your estate to be divided among your children in an equitable way, you may need to consider updating your Will to reflect any funds or gifts given to any of them during your lifetime.

There are also very complex Capital Gains Tax and Inheritance Tax (IHT) rules and it is easy to trip up, particularly when it comes to holding shares in property or if you are relying on IHT taper relief which is a 7-year sliding scale of payable inheritance tax. If you believe that your estate will be liable to IHT or you are thinking about making a financial decision which could lead to a Capital Gain event, you will need expert advice beforehand.

There are some circumstances where a gift could be viewed as a deliberate attempt to evade care home fees, and this can be problematic at a later stage.

Is a Declaration of Trust needed?

A Declaration of Trust is one of the ways you can protect any funds that you contribute for a property deposit. With this kind of arrangement, it’s possible to go into more detail about how the sales proceeds from the property should be dealt with when it’s eventually sold, and also what should happen in the event of a relationship breakdown. The Trust can also include information on liabilities for outgoings. Bear in mind however, that if your child marries after the Trust is created the terms of it could be overruled.

Are the funds a loan or a gift?

It is very important to make it clear from the outset whether the funds are a gift or a loan. If your expectation is for the money to be repaid when your child is in a stronger financial position, then it is essential to set out the terms.

However, you will need to first discuss and agree with your child the repayment conditions of the loan and any interest which will become payable. As part of these discussions, you should also decide on what would happen to the loan if it’s not paid back before you die.

If you would prefer to have protection for the loan, placing a legal charge on the property is one option. You would need to set it up as a formal loan and then back this with the security of placing a charge on the property. You will need a solicitor to draw up the necessary paperwork and if there’s a mortgage on the same property, the lender will have to consent to the charge. When the property is sold, the proceeds are used to settle the loan.

Is there a long-term partner or spouse buying with your child?

Whether your child is buying alone or jointly with a partner may affect your decision as to whether the cash is a loan or a gift. The full implications should be considered, and it may be advisable to take steps to protect the contribution of your child. A legal charge would be one way to achieve this. Having a Will in this scenario is extra-important, both for your child and their partner.

Can I make a joint property purchase with my child?

Another alternative would be to purchase the property jointly with your child, funding it with a joint mortgage. There are pros and cons to this option that you should carefully consider, including the fact that you would be equally responsible for the repayment of the full sum. Capital Gains Tax may arise upon the sale of the property and stamp duty at a higher rate may be due if it’s a second home.

When providing either a loan or a gift to your child, it is imperative to consider the full circumstances and the optimal way to achieve the best outcome. Acting as the Bank of Mum and Dad is not always as straightforward as it seems and pausing to get legal advice before offering to step in is highly recommended.

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