An increasing amount of young people are relying on the ‘bank of mum and dad’ to purchase their first home. According to a recent Savills report, 52% of first time buyers received help from their parents in 2024. This trend is expected to continue and parents should consider a number of factors in supporting their children in this way.
The support may be by way of:
- A financial gift
- A loan
- An assignment of contract to buy a property off-plan
Financial Gift
Most importantly parents must decide whether to make a gift or a loan. A gift is the transfer of money without any expectation of repayment nor any interest in or control over the property.
If the child is intending to use a mortgage, a gift may be the only option since many mortgage lenders will not proceed with loaned funds. It is sensible to speak to a mortgage broker on this point at an early stage. Where a mortgage is involved parents will need to sign a declaration of gift in the mortgage lender’s required format.
Parents should consider ways in which they may protect their gift for the family, for example, should the child later be in divorce proceedings, or errantly sell the property. If a parent is a co-owner this will increase the Stamp Duty Land Tax payable for second property ownership. Parents may wish to consider requiring the child to enter a restriction on the title requiring their consent to sell, which imposes an administrative hurdle (although no concrete protection); or mooting prenuptial agreements.
There are tax implications. If a parent were to die within 7 years of the gift then it may be subject to inheritance tax. Gifts of up to £3,000 are exempt from inheritance tax and the allowance can be carried forward for one year, making a potential £6000 available.
Loan
A loan structure can be used to give the parents more control, and this can be supported by a legal charge (a mortgage) over the property in favour of the parents, subject to the agreement of any principal mortgage lender. The parties are free agree the detail of the loan terms, whether any interest is payable and whether it may be waived in the future.
A formal loan agreement should be put into place but this need not be complex. If parents decide to charge interest on the loan, the income will be subject to tax. If the gifting parent were to die, the amount of the loan would remain within their estate for inheritance tax purposes.
Assignment of Contracts
Parents may purchase an off-plan property and closer to completion of the construction choose to assign/transfer the benefit of their contract (and the paid deposit) to their child. They may ultimately gift the balance or the child may obtain a mortgage for the amount payable at completion. In the latter case, parents and children should be aware that some mortgage lenders are reluctant to lend in cases of ‘assigned contracts’. If the property has gone up in value since the date of contract potentially capital gains tax could be payable and specialist advice should be sought. Similarly, the tax implications of gifting the deposit would apply, as set out earlier. If there have been changes in Stamp Duty Land Tax between the date of the contract and the date of the transfer then those changes may apply to the contract. Legal advice should be sought on this point on a case by case basis.
Conclusion
Whichever way parents choose to support a home purchase it is evidently important to seek comprehensive and joined up advice. Quastels offers specialist real estate and tax advice with access to a network of trusted advisers. Contact: enquiries@quastels.com
