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The bank of mum and dad – helping your children buy a home

27 Oct

Despite falling house prices and countless government promises, it is harder now for young professionals to get on the housing market than it has been for generations. For many of our children and grandchildren there’s the possibility of becoming trapped in the rental cycle – long term. It’s understandable, then, that many of us are concerned about helping the next generation get their first step on the housing ladder.

There are plenty of different options for providing aid for your children, beyond simply buying them a home. If you’re planning ahead, here are some of the options for you to consider.

1. Providing a Deposit

The problem with purchasing a home or paying for a deposit outright for your child is that this will come with Inheritance Tax (IHT) consequences. Should you survive for seven years after supplying your child with the deposit, the IHT rules will not apply.It’s also worth keeping in mind that gifts of up-to £3000 per year are exempt from IHT. What you might not know is that un-used exemption from the previous tax year can be carried forward – making the total amount IHT exempt, £6000. The exemption also applies per person, so even a married couple can provide a gift of up-to £6000

To make sure that your children are covered in the event that something should happen to you; it’s worthwhile writing your beneficiary child a dated letter stating the amount you’re giving them and that it is a gift. They should then take care of this letter for the next seven years – or in the event of your death, hand it to the executor of your will.

2. Help with Mortgage Payments

A guarantor mortgage will allow you to support your child’s home purchase, it does however come with a catch. As guarantor you will take on the risk of your child defaulting on mortgage payments.

If you’re looking for a great deal on a mortgage, this isn’t ideal. This won’t boost your child’s deposit or offer a better interest rate – it will however help your child achieve a loan which the bank might not otherwise

3. Buying a property

If you’re in the position to be able to afford to buy property, there are ways of minimising the hit to your own finances – however, we strongly recommend discussed with a trusted financial advisor before committing yourself to any purchases.

It is possible to set-up a formal written trust with the help of a solicitor and purchase a property through the trust (naming yourself as a guarantor to the mortgage). Depending on whether you have one or multiple children who you would like to benefit from the property, you can set up either a life interest trust or a discretionary trust.

The benefit of purchasing a second property in this way is that you are not liable to pay capital gains tax (CGT) on the purchased property and your CGT exemption on your home will not be affected .This can be a helpful way of allowing your children to live rent-free while they save for a deposit of their own.

4.Joint Purchase of a Property

While purchasing a property with a child might seem like the most straightforward way of helping them onto the first rung of the property market, there can be legal and financial implications. Make sure that before you embark on any kind of joint venture you consult with a financial advisor and have all the correct documentation in place.

We all want the best for our children, so it’s important that you protect both your own assets and their future stability. If you’re considering how you will continue to support and provide for your children as they move into adulthood, get in touch with one of our specialist advisors at Dua. We can make sure that you’re in the best possible position to protect your own interests, while giving your children that much needed helping hand.

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As a business, we have been clear in our commitment to Diversity and Inclusiveness. An important part of this is understanding the 'mix' of our people and measuring progress towards the goals that we have set ourselves. We can share our approach to employee monitoring, together with some statistics showing the make-up of our business. To obtain these please email us at dua@dua.co.uk