12 May 2016
Author: Stephen Breen
A report by the Centre for Economics & Business Research and Legal & General reveals that parents contribute more than £5 billion a year to their children’s house purchases. If you’re considering helping your child take their first step on the housing ladder, there are a few things you’ll need to know to help you avoid the potential tax and financial pitfalls.
Giving your child cash
For most first time buyers, raising a large enough deposit to secure a good mortgage deal is the biggest problem. The ONR states that the average property price for first time buyers is £220,000 – and with most lenders asking for a 10% deposit, buyers will need to find at least £22,000 plus fees and costs to fund their purchase.
If you decide to simply hand over some or all of the deposit to your child, they’ll need to tell their lender that the cash came from you, and you’ll need to confirm that it is a gift without any obligation to repay. If on the other hand you want to simply loan the money, the lender will need to know what the repayments will be so they can factor these in to their affordability calculations.
Handing over some or all of the deposit won’t guarantee your child will be given a mortgage, however. Strict affordability criteria which looks at everything from money spent in restaurants to future plans for children mean that even those with a reliable income and good credit history can be rejected. In such circumstances, you may need to consider whether you can offer your child further help in support of their application.
Of course, not everyone has the means or inclination to hand over thousands of pounds in cash. If you’re unable to give your child the money for their deposit, you may wish to consider one of the other options that enable you to help them.
Family Springboard Mortgage
For parents who have funds but don’t want to give them away just yet, a family springboard mortgage may be a viable option. This product is offered by Barclays Bank and allows buyers to borrow up to 100% of the house price.
You deposit the funds in an agreed savings account with Barclays and leave them there for a minimum period (three years in the case of Barclays). If your child makes all of their mortgage payments during this time, you’ll get your money back at the end of the period with interest. If not, Barclays will take whatever is owing from the account to cover their losses.
The benefit of this is that parents can help their child without handing over their savings, allowing them to potentially help another child or grandchild in the future. The downside is that your money is tied up for a number of years and you may lose everything if your child defaults on their mortgage payments. This type of account also does depend on you having sufficient funds to deposit with the bank which won’t be the case for everyone.
Another way you can help your child which doesn’t involve handing over a wad of cash is through a guarantor mortgage. A number of building societies and Aldermore bank offer guarantor mortgages where you promise to meet your child’s mortgage payment if they fail to do so. These usually require that you provide collateral for the loan, which is typically a charge over your own home. This type of product will therefore only be suitable for you if you have adequate equity in your home.
The benefit of this type of arrangement is that if you don’t have the funds to help your child out, you can use the equity in your home instead without actually having to release the funds. The downside is that should your child fall into arrears, you may be forced to remortgage or even sell your home in extreme cases. You will also need to complete an affordability assessment to show that you can meet your own commitments and the mortgage payments, should you be required to do so.
In most cases your child will still need to provide a deposit, even though you are standing as guarantor for them.
The tax implications of helping out your child with their mortgage will depend on the sort of help you give them.
If you give your child money for a deposit, there may be inheritance tax (IHT) implications. You can give as much as you like, provided that you survive for seven years after making the gift. You can also give up to £3,000 a year with no IHT implications and this can be backdated by one year, allowing you and your partner to give your child up to £12,000 straight away. If your child is getting married, you can give them a wedding gift of £5,000 which may be used as a deposit (£2,500 if you are a grandparent) and again, both you and your partner have this allowance.
If you give more than the allowed amounts, inheritance tax may be due on the value of the gifts if you do not survive for 7 years after making the gift. The charge is 40% between 1 and 3 years of making the gift and this is then tapered between 3 and 7 years.
Another liability to be aware of is that stamp duty is 3% higher on second homes and the higher rate will be charged if your name appears on your child’s title deeds to their property (assuming you already own your own home). This can also apply if you decide to take a joint mortgage with your child.
A further consideration is capital gains tax (CGT) which may again be charged if you are named on your child’s title deeds and their property is later sold. CGT is not payable on your main residence but as your child’s property will be treated as your second home, CGT may be charged at 18% or 28% (depending on your income) on any profit made since the property was purchased, less any selling costs. Everyone gets an annual CGT allowance (£11,100 for 2016/17) so you will only pay CGT on the amount over your allowance.
Covering your back
Whatever agreement you come to with your child to help them out, it’s essential to record your arrangement in a legal document which should be drawn up by a professional. Although we’d all like to think a family dispute will never arise, it’s impossible to predict the future – and you don’t know who will be involved with or influencing your child’s life in the years to come. By drawing up a document with a solicitor, you can record your arrangement and also dictate what will happen if circumstances change – for example, if a partner moves in with your child or your child separates from their current partner in the future.