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Getting on the property ladder for the first time is not easy, and as house prices rise and the availability of mortgages sometimes is limited, it is set to get even tougher.
The difficulty in buying property for the first time means that the number of homeowners in the UK is falling, while the number of renters is climbing. Experts predict that if the current trends continue, renters will outnumber buyers for the first time.
With an average deposit of £57,000 needed to buy a property, many first-time buyers simply cannot get on the ladder and are turning to their parents for help.
Buying property for children can be complicated and there are tax issues to consider when parents buy property for their children, such as Inheritance Tax. Here is a closer look at the options, with the pros and cons of each.
Giving Your Children Money
According to one study, almost half of all buyers aged under 35 receive financial help from their parents to buy their home. Without receiving a helping hand, most buyers would have had to delay their purchase by at least five years.
Even if your child can just about stretch to buying their own property, giving them some money means they may be able to buy something more suitable or qualify for a cheaper mortgage deal. Having a higher deposit means that lenders will either be more willing to accept a borrower or may offer lower interest rates.
Most banks are willing to accept a deposit provided by parents, but you may need to provide a written statement confirming that it is a gift and not a loan. This is because they will want to factor in any loan repayments that your child has to make to you in their affordability check. This also ensures that if they had to repossess the property, you could not claim to own a stake in the property itself.
Be aware that some banks limit the amount of money that you are able to gift. For example, some lenders insist that at least 75% of the deposit is from the buyer’s own funds.
There are no immediate tax implications for gifting money for a deposit for either you or your child. However, you will need to consider Inheritance Tax and what potential implications there may be.
You are allowed to give away £3,000 every year, and you can carry over any unused allowance from the previous year. This means that you can give your child £6,000 from one parent or £12,000 if the gifts are from two parents. This is made on the assumption that you have not made any other financial gifts during that period.
If you survive for seven years after the gift there are no financial implications. Should you die sooner and your total estate is worth more than £325,000, Inheritance Tax may be payable. There is a sliding scale, and the longer you survive after the gift, the lower the rate of Inheritance Tax.
It is generally a good idea to obtain financial advice as early as possible if your estate is likely to be subject to Inheritance Tax (above £325,000 in value).
Gifting Property to Children
With all the potential restrictions on giving money, buying the house yourself may seem like a simpler option but it comes with its own difficulties.
You can buy a property for your child to live in, with the intention that they will legally own it in the future. However, as it will be a second property owned by yourself, there will be tax implications. You will have to pay stamp duty immediately at the higher rate (a 3% surcharge above the standard SDLT rates for owing more than one property) and capital gains tax may also apply when you gift the property later.
You can choose to give the property to your child before you die, but the same rules about Inheritance Tax apply. If you survive for seven years or more no Inheritance Tax will apply, but if you die sooner, a sliding scale of tax will be payable. Remember that capital gains tax will apply on the gifting and so if you also die within seven years then CGT and IHT may be charged.
You can also keep the property in your name and pass it on to your child when you die. In which case, only IHT may apply.
However, inheritance tax changes slightly when factoring in your home property. If you are leaving the property to your children (or grandchildren) then the threshold increases to £500,000 providing your whole estate is valued at less than £2 million.
Whether gifting property to children or giving them money is more tax-efficient depends on your personal circumstances and will need tax planning.
Putting Property in Trust
If you are keen on the idea of buying the property for your child but are concerned about tax implications, buying a property using a Trust fund may be a potential solution. This could allow your child to live in the property rent-free and also inherit it when you die. Depending on the type of trust it could also avoid capital gains tax and inheritance tax.
But there are complications such as whether you will have to pay an immediate 20% IHT charge when setting up the trust and whether the ten year anniversary charge will be payable at up to 6% each tens years thereafter.
There are different types of Trust which can be set up, such as a Discretionary Trust and a Life Interest Trust. Some Trusts are more flexible than others, and you can maybe transferred to a different child if circumstances change.
There can also be complications if your child wants a friend to share their accommodation. It is important to get financial advice before going down this route, and being very clear about the different options you want to consider.
Joint Mortgage: Parent and Child
As an alternative to gifting money or buying property for children outright, you could also take out a joint mortgage. This can be helpful if your child is struggling to be accepted or to qualify for a mortgage on their sole income.
However, the same conditions about owning a second home will apply again, which means higher stamp duty and potential capital gains tax liability when your proportion is disposed. First-time buyers can qualify for lower stamp duty, but this would not be the case if you are also on the property deeds.
Some lenders may be willing to consider a mortgage without you being put on the property deeds, as only a guarantor, which could resolve the tax implications.
If your child can afford the mortgage on their own, you could offer a portion of your own home as security. This can persuade lenders to offer a mortgage because their have the back-up of your own home should anything go wrong with repayments.
Hopefully all will go as planned, and you will not ever need to step in but if your child defaults on the mortgage your home could be at risk. This option should only be considered if you could afford to repay the loan if your child is unable to.
Choosing the Right Option
There are many options for buying property for children and there is no single right answer. The best solution depends on your personal circumstances so it is always advisable to seek financial advice before taking action.