The Bank of Mum and Dad.
A recent survey by Legal & General found that the total amount of lending by parents to enable children to buy property is £6.5 billion. This makes the bank of mum and dad the ninth largest lender in the country!
Over a quarter of all property transactions involve the use of funds from friends and family.
Naturally, parents (or as is often the case, grandparents) wish to use their resources to help the younger generation get on to the property ladder. This has become more and more common, as the cost of borrowing from the usual high street lenders is so high and their criteria for lending has become so strict. But what are the advantages and disadvantages of these arrangements?
This can depend on whether the parents make a gift or a loan or decide to own a share of the child’s property.
A gift keeps things clean, in that, there is no ongoing tie between parents and child but there are implications for both.
If they all fall out, is there an expectation that it should be repaid? Is the gift to just the child or the child and their spouse/partner (who may later separate)? Is it fair to the other children?
A gift has implications for the amount of inheritance tax that has to be paid when someone dies and this can affect not only the person who has made the gift but also the person who has received it.
If it is a loan, what are the repayment terms? Is it subject to interest (this could be taxable income in the hands of the parents) and at what rate? When should it be repaid and should this be as one lump sum or in instalments? What happens when one or other of the parties dies?
A loan should be protected by a charge registered against the title to the property. This may cause problems if there is another lender involved – a commercial lender would expect a first charge, which would take precedence over the parents’ charge, and the lender may impose certain conditions or try to insist that it is a gift and not a loan.
Neither a Gift nor a Loan
The parents may decide that they would want a share in the ownership of the child’s property. This should be protected by a declaration of trust, setting out what percentage share each of the parties has. But what about further expenditure on the property – who pays and who benefits, because if it increases the value of the property, the value of each party’s respective share will change? Does this need recording and would further professional valuations be required?
Who is to be responsible for the usual outgoings: utilities, repairs/maintenance, insurance and council tax? Usually, the person occupying the property – the child, but the parents would want to make sure that there is adequate insurance protecting their interest, in case the property burns down for example.
This option could create a Stamp Duty Land Tax problem though, as there is now a higher rate SDLT charge for people who buy a second (or subsequent) property. A share in a property counts just as much as owning a separate property does.
The same applies to Capital Gains Tax and so, when the child sells the property at a later date and the value of the parents’ share has gone up, there could be tax to pay.
For all of these options, what control do the parents have on who lives at the property with the child and what security of tenure they may obtain? For example, the child may bring in a new partner.
It is vital for both parents and child to make a Will in these circumstances. A Will controls what happens to a share in a property and it can include such things as a right to live in the property, the cancelling of a loan and the balancing out of an estate to produce fairness amongst all the beneficiaries.
With so many things to consider in an arrangement such as this, it is vitally important that expert advice should be obtained before committing to anything. A detailed and transparent plan should be produced and discussed with all parties and it is likely that each ‘side’ should obtain their own independent legal advice on the final arrangements.
Chris Milne, who heads up our Private Client department, works closely with our Property Team in these transactions, combining their expertise to ensure that our clients receive the best possible advice and that everyone’s interests remain protected.
It is best to be well prepared and properly advised. Contact Chris by email or call on 01630 652405.