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The Bank of Mum and Dad

Please note that the information herein is of a general nature and you should not act or refrain from acting on it without professional advice on the specific facts of your case. No liability is accepted by the author or Sykes Anderson Perry Limited in respect of this article. Taxation and property law are complex subjects and the above is a basic outline only and is intended only as a general guide. Nothing herein constitutes financial advice.

What is it?

Soon to be the 10th biggest lender in the UK, it is now more common than not that the ‘Bank of Mum and Dad’ will be gifting or lending money to their children to help them buy a home.

How is it usually done?

Gift

Often parents simply give the money to their children. By transferring the money into the children’s accounts for them to send it to the solicitor. Alternatively, the money is sent by the parents direct to the solicitor though the solicitor is likely to need to know the source of funds is from parents and identify the parents. Any gift needs to be reported to a mortgage lender.

This means the children can do what they want with the money and the property. As parents, you have no further control.

Loan

This is often done by way of an unsecured loan repayable on demand with no interest, usually with a letter or some other simple document or verbal agreement.

What could go wrong?

Whilst it seems pretty straight forward to pay some money to help a child buy a home most people do not consider the potential pitfalls which could result in the child paying tax on the gift given or the parents hard-earned monies being unrecoverable and used in a manner they do not approve.

Tax

If it is not clearly documented that the payment is intended to be gift and when it is transferred it could still make up part of the parents’ estate when inheritance tax (IHT) is calculated. Also, depending on the provisions of any Will, the child could be required to return some of the gift so it can be paid out to other beneficiaries.

Mortgage

If the child is also obtaining a mortgage from a high street bank the bank will require assurance that the monies are a gift and that the parents can have no claim over the property that would rank above the bank’s.

Control

Family relationships can often be complicated. By simply handing over a lump sum to use for a property purchase the child has then got control of the property they buy and how it is later dealt with. Although the intention would be for the child to have somewhere to live, and investment of the parents’ money, the property could be sold or transferred to a partner or friend. The parents’ money could then be lost.

How can we help?

Deed of Gift

By documenting that a gift of monies was made in a legal deed it makes the intention behind the transfer of monies clear and explicitly sets the date the gift was made as proof to be used by the child in the calculation of IHT when the parent’s estate is being wound up.

Loan Agreement

Having a loan agreement in place will ensure there is a legal relationship in place in which monies will be repaid either within a set time period or on demand by the parent. The agreement could be more complicated with interest provisions and repayment terms if suitable.

As a more secure basis to ensure the monies given will eventually be repaid the loan can be secured with a mortgage over the property. The mortgage is registered in the names of the parents and gives more control over the use and sale of the property. The loan would need to be repaid once the property was sold or transferred. This may be worth considering if there is a concern about a child’s partner. The mortgage and loan can always be released later on though this may have tax consequences. If the child is also obtaining mortgage from a high street bank then the bank would need to approve this arrangement.

Review the Ownership Structure

There may be different options on how the legal or beneficial title can be held to help retain control over the use of the property and when it is sold depending on individual circumstances.

Parents can jointly own the property with their children. This gives much higher degrees of control and an agreement can be entered into setting out each parties share. The shares owned by the parents can be gifted to the children at a later stage.

Alternatively, the property can be held by the parents in trust for the children with provisions for when they become entitled outright to the property or in the name of a holding company where the children are the shareholders and parents directors.

Any of these methods would need expert advice and to assess any tax implications before they are put in place.

June 2017
Gemma Wright
Solicitor and Director