With high interest rates, soaring prices and intense competition for properties entering the market, many first-time buyers are finding it harder than ever to take their first step onto the property ladder. In an increasing number of cases, it falls to the bank of Mum and Dad to support their children’s home-buying dreams.
Tom Roseff, a partner with BHP’s real estate tax advisory team, shares several options often considered by parents seeking to support their children with a property purchase.
Gifts and inheritance tax planning
Parents can gift money to their children to help with the property purchase. Such gifts will generally be exempt from inheritance tax as long as the parent survives for seven years after making the gift. However, it’s essential to be aware of the seven-year rule and plan accordingly to minimise any potential tax.
Advancing a loan
Another option is to lend a child the money needed to fund some or all of the purchase price. Such arrangements are relatively simple to put in place, albeit a solicitor should be involved to prepare a written loan agreement, setting out any interest being paid on the loan and when it needs to be repaid. For example, when the property is sold. Interest charged on such loans would, however, be taxable on the parents, so care should be taken to ensure the tax implications are understood.
Buying jointly
Some parents may want to protect their investment and so may wish to buy the property jointly with their children. With combined incomes, a larger loan could possibly be taken, but a disadvantage to this plan is that, if the parent already owns a property, their share in their child’s new home would count as a second home. This triggers an additional 3% stamp duty land tax charge. Additionally, the parent is likely to have a capital gains tax (CGT) liability when the property is sold, or if it is gifted to the child at a later date.
Regular gifts out of income
Parents can make regular gifts from their income, known as ‘gifts out of normal expenditure.’ As long as these gifts do not affect the parents’ standard of living and are part of a regular pattern, they may be exempt from inheritance tax. This can be a steady and tax-efficient way to both help children build a deposit, and to provide ongoing financial support with the costs of a mortgage.
Utilising the Annual Gift Allowance
Every individual in the UK has an annual gift allowance of £3,000, which can be gifted without incurring inheritance tax. Parents can take advantage of this allowance each year, allowing for a systematic transfer of funds without triggering potential inheritance tax exposures.
Family trusts
In certain circumstances, establishing a family trust can be a tax-efficient way to manage and distribute wealth. Trusts can be tailored to accommodate specific circumstances, providing flexibility in how assets are distributed while potentially reducing inheritance tax liabilities. But care is needed on the potential tax costs that can arise upon the settlement of a trust, as well as over its life. Families considering putting such arrangements in place should therefore ensure that appropriate advice is taken to fully understand the implications.
While there are a number of options available to parents wishing to help their children onto, or up, the property ladder, professional financial and tax advice should always be obtained before implementing any of these strategies. Each family’s financial situation is unique, and a tailored approach will ensure that parents can support their children’s dreams of homeownership while making the most of available tax benefits. By planning wisely, parents may well be able to contribute to a secure future for their children without compromising their own financial wellbeing.
