Research by the Halifax has found that 2016 had the highest number of first-time buyers since the start of the financial crisis in 2008. With the average deposit being £32,321, first-time buyers are increasingly dependent on family members to help them fund the required deposit.
If you are considering helping your children out with a property purchase then a key question is whether you are going to make a loan or a gift to them.
Loan
If you decide to loan the cash then you will, at least in theory, get it back. It also means that you retain some control over the funds. It is a good idea to formalise the loan in writing. The loan document should deal with, amongst other things:
- When the funds will be repaid;
- Whether interest will be charged;
- What will happen if one party dies; and
- Whether there will be any security given.
Obviously these points will need to be agreed between you and your child. If they are also getting a commercial mortgage, the loan will need to be disclosed to the lender.
Gift
If, instead, you decide to make a gift of the cash, it is still a good idea to document this in writing. Don’t forget to consider the tax consequences of making a gift. Broadly, for inheritance tax purposes, the gift will be subject to the “seven year rule” meaning that if you do not survive for seven years following the date of the gift then the value of the gift is brought back into account on your death when calculating the inheritance tax due on your estate. There may be other exemptions (such as the annual exemption or the marriage exemption) of which you may also be able to take advantage.
Making a gift of funds can be worth considering as one element of your inheritance tax planning.
Other considerations
Where a child’s spouse or partner is involved, this often gives rise to worries about what would happen were the couple to break up. When the couple are purchasing the property, they should give serious thought to whether it should be owned as “joint tenants” (meaning that if one of them dies, the other will automatically own the whole property) or as “tenants in common” (so that they each own a share of the property and those shares pass in accordance with their Wills, or under the intestacy rules). Any agreement as to how much each party owns should be properly documented in a declaration of trust. If a key concern is asset protection then the using a substantive trust may be worth considering. Alternatively, it may be worth considering putting a co-habitation agreement in place. If the couple are going to marry, it is also worth considering a pre-nuptial agreement.
It is often easy to proceed with transferring the money without recording what has happened or thinking about the wider issues. This may not be a problem whilst everyone is getting on. Later down the line, though, disagreements do happen whether this be with a family member, ex-partner or HMRC. By getting advice and putting formal paperwork in place at the outset, you can help minimise the risk of a dispute in the future.