3 ways to help your child buy a property – 3 ways to provide finance
Mounting house prices, more rigid credit criteria and rising amount of average deposits have made it more difficult than ever for first time buyers to afford property. For the most part, young people will have to borrow money from their parents in order to buy their first home.
However, there are numerous ways in which you can help your children get on the property ladder. Considering all the tax consequences, different ways of providing funds for the purchase and the legal position of boyfriends, girlfriends, sons- or daughters-in-law and spouses, what is the safest and most efficient way for parents to help?
1. Deposit as a gift
The easiest way to help is to give your child money for a deposit as a gift. This method is straightforward and comparatively tax-efficient. Provided that the parent does not pass away within 7 years of making a gift, there are no immediate tax implications. The outright gift will be outside of their estate for inheritance tax (IHT) purposes when they die. Otherwise, the gift made by the parent will be taxed at 40% on the value of any property that costs more than £325,000. However, please note that an outright gift does not offer protection, in case of divorce and bankruptcy.
2. Buying a property in your own name for the child to occupy
Alternatively, you could buy a property for your child to occupy. This would protect the assets in case of your child’s divorce or bankruptcy, but this approach is not tax efficient. On the sale of the property it will be treated as a second property and any gain will be subject to Capital Gains Tax (CGT). Therefore, since the introduction of the stamp duty surcharge (3% above the standard rate) the property will end up costing you more overall. The property will also form part of the parents’ estate for inheritance tax (IHT) purposes, meaning you will have to pay more tax.
In order to avoid the above parents could loan their children the funds. Family loans are interest free. This approach is tax efficient for CGT and stamp duty but not for IHT, as the value of the loan remains in the parents’ estates.
3. Gifting cash to a trust
The most tax efficient approach, which also allows protection of the assets, is for parents to give the cash to a lifetime trust, after which the funds are lent to the child interest-free. The funds will not form part of the parents’ estates for the purpose of IHT if they survive 7 years, nor will they form part of their child’s estate. The trust structure is also more tax efficient, for the purpose buying and selling the property, for stamp duty tax and CGT. The stamp duty surcharge for second properties will not always be payable and the sale of the property is likely to be free of CGT as a principal private residence.
Lifetime trusts can exist for up to 125 years and so the funds can potentially be used for future generations of the family as well without being subject to IHT.
Declaration of Trust
The Declaration of Trust is noted on the land registry, alerting future buyers that there is more than one person owning the property and ensures that the loan from the parents and the division of the equity of the property on separation, are documented from the start.