With house prices high in relation to earnings, many parents and grandparents are looking at ways to help their children/grandchildren on to the housing ladder through the 'Bank of Mum & Dad'.
Here are five ways to help achieve this, but you need to make sure that you select the right one for you and your family’s circumstances.
1. Cash gift
A cash gift towards the purchase in the child’s name is perhaps the most obvious way to help, but not without some important considerations. No Capital Gains Tax (CGT) is payable on cash gifts, and it will be a Potentially Exempt Transfer (PET) for Inheritance Tax (IHT) purposes; this means no IHT to pay now, but IHT could be due if you were to die within seven years of making the gift.
As with all gifts you need to be comfortable with giving away the cash absolutely. Are you confident you will not need it in the future? Or that your child will not squander the cash? How secure is their relationship with their partner? You would not want them to lose some or all the money if they were to separate.
From a Stamp Duty Land Tax perspective, a purchase in the child’s name is often preferential as it is likely to qualify for the first-time buyer’s exemption and avoids the 3% SDLT surcharge that applies to the purchase of second homes.
An alternative may be to lend the money to your child. That way you can still retain some control over the money, demand it back if needed, and protect it if your child splits up from their partner.
You could ensure your money is protected by a Declaration of Trust which states that the house is to be sold if you need the cash back and agree fair terms, so you and your child are both protected.
For further security you may want to consider registering a restriction over the property so that it could not be sold without your consent. As with above, it should also be possible to benefit from SDLT first-time buyer’s relief and avoid the 3% surcharge.
3. Purchase it yourself and let them live there
You could purchase the property yourself and allow your child to live in the property. You retain ownership and control over the property, but the downsides are that any gain on a subsequent gift or sale will be taxable as it will not qualify for the valuable principal private residence (PPR) relief, the property will continue to form part of your estate for IHT purposes and will be subject to the 3% SDLT surcharge.
4. Second home
If you are fortunate enough to already own a second home, this could be gifted to them. However, you must remember that this is a capital disposal for CGT purposes and the property will be deemed to have been sold for its open market value. This could mean that you will have CGT to pay even though you’ve received no actual sale proceeds from which to pay it. As with a cash gift, this will also be a Potentially Exempt Transfer for IHT purposes, subject to the same conditions explained above. The good news, however, is there is no SDLT to pay on a gift!
5. It’s never too early to start planning
If your children are not yet at the moving out stage, now might be the time to start planning how to help them with the biggest purchase of their life. Regular savings could be put aside in a number of tax efficient investment vehicles including the lifetime ISA, which is available to 18-50 year olds, and offers a 25% bonus to savings funded by the Government if the funds are used to purchase a first home. Such regular savings, if made from surplus income, could potentially be exempt from IHT too.
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