What to consider before you become the Bank of Mum and Dad
News reports suggest that the average amount donated by the ‘Bank of Mum and Dad’ is £18,000. This is a massive boost to deposits for first time buyers, but it can raise other issues. Wills, Trusts and Probate lawyer Ed Coode and Residential Property lawyer Kate Manning discuss these.
Here at Coodes, we see parents helping their adult children with funds ranging from a few thousand pounds right up to the gift of a house. This needs careful thought and planning, so these are the things we think you should consider.
Have you made note of the gift in your Will?
If you have children, and want to divide your estate after your death fairly between them, then you may wish to update your Will to take account of a gifts or deposits given to each child during your lifetime(s).
The Inheritance Tax (IHT) and Capital Gains Tax rules around gifts are complicated and there are many pitfalls, particularly with regards to shares of property and IHT taper relief. If you think IHT may apply to your estate, or you are giving or creating a new interest that may trigger a Capital Gain, then you should take advice from one of our lawyers before making the gift.
In some circumstances a gift could be seen as trying to avoid care home fees, which may cause problems later on.
Do I need a Declaration of Trust?
If you decide to gift money to your child for a deposit, you could protect the money you have gifted with a Declaration of Trust. This can state who gifted the money, how it should be divided when the property comes to be sold and lay out responsibilities for outgoings and what happens to the property if a relationship breaks down. You should consider that if your child goes on to marry, this could affect the enforceability of the Declaration of Trust.
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Are you making a gift or a loan?
If you expect it to be paid back when your child is financially better off then you should discuss interest, repayment conditions and security with your child before we can advise on documentation and appropriate safeguards for you both. You will also need to consider what should happen to this loan, if you were to die before it was paid back.
Are you going to take a legal charge on the property?
One of the best ways to protect the money you are lending to your children is to make a formal loan and then secure it by registering a charge against the property being purchased. However, if there is a mortgage then the lender must consent to this. If the property is sold in the future, your loan could then be paid back. If you are thinking about taking a legal charge, you will need to instruct a lawyer to draw this up for you.
Is your child buying with a spouse or long-term partner?
This may affect whether you wish to make a gift or a loan to your child. You will need to consider the implications, and you may decide to take a charge on the property to protect your child’s contribution. In these circumstances, your child and partner should also make Wills.
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Should I jointly purchase the property with my child?
You could jointly purchase a property with your child and take out a joint mortgage, although this would make you equally liable for the repayment of the loan. There are advantages and disadvantages to this. Higher rate stamp duty could become payable if the property is your second home and there could be Capital Gain implications upon sale. Our team can advise you of the potential implications if you are considering this approach.
Is this a gift from your own resources, or are you releasing equity from your home to fund it?
This will need careful consideration and we can advise you on the implications of the different options. We have a specialist team who can advise you on equity release mortgages.
Whatever your circumstances, you will need to think carefully about the best way of dealing with the gift or loan to your children. Being the Bank of Mum and Dad is often more complex than you first think, so take a step back and get legal advice before you offer to help.
For more information on this issue contact Ed Coode in the Wills, Probate and Trusts team at Coodes Solicitors on 01726 874700 or email@example.com, or contact Kate Manning in the Residential Property team on 01566 770000 or firstname.lastname@example.org.