22 Apr 2016
With house prices soaring, more parents than ever before are stepping in to give their child a helping hand onto the housing ladder. But well-meaning parents could find themselves subject to stamp duty, capital gains tax and inheritance tax as a result of their generosity.
Stamp duty changes
The recent changes to stamp duty rules introduced a 3% hike on rates for second homes. While properties up to £125,000 would normally attract no stamp duty, a second home in this bracket would be charged at 3%. Properties priced from £125,001 to £250,000 attract a 5% fee rather than 2%, and properties in the £250,001 to £925,000 bracket attract an 8% fee rather than 5%. Properties valued at less than £40,000 are not affected by the changes.
If you already own your own home and decide to purchase a property jointly with your child, their property could be classed as a second home – attracting the higher stamp duty rates. A £150,000 property, for example, would be subject to £5,000 (5%) stamp duty, rather than the usual £500 (2%). To avoid this, you could give your child the money for their deposit, act as their guarantor and ensure the property is held in their sole name. Alternatively a few lenders, including Metro and Barclays, allow parents and children to obtain a mortgage on a ‘sole proprietor, joint borrower’ basis, meaning that the parent is not named on the title.
Capital gains
Last year 19,000 homes were bought by first time buyers without the need for a mortgage, according to research by Hamptons. These purchases were funded at least in part by family members of the buyers, often with the understanding that they would be paid back at some point in the future. However, if you invest this way in your child’s property, the value of the property goes up and your child then decides to pay back your share, this is viewed as selling an asset. You have a £11,100 capital gains allowance each year and any increase over and above this amount will be subject to capital gains tax at 18%. Should the money you advance be viewed as a loan, you may also be subject to income tax on any interest income.
Inheritance tax
If you give your child more than £3,000 towards their house and then die within seven years of making the gift, your child could be liable for inheritance tax, depending on the overall value of your estate. Liability is tapered – tax is charged at 40% on gifts made up to 3 years prior to your death, 32% on gifts made within 3 to 4 years, 24% for gifts made between 4 and 5 years, 16% for gifts made between 5 and 6 years and 8% for gifts made between 6 and 7 years.
You can give your child up to £3,000 a year without any inheritance tax implications – so a very effective way to help them buy a house is to open a help to buy ISA in their name. You can make an initial £1,000 deposit, then contribute £200 a month until they are ready to purchase their home. At that stage, the Government adds a bonus of 25% on balances of up to £12,000. Accounts worth considering include Halifax, Penrith, Cumberland and Santander, all of which offer 4% interest on their Help to Buy ISAs.
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