Helping children get on the property ladder to become more difficult
Every parent wants to help their child get ahead in life and for many this involves passing on some savings to help them get onto the property ladder. But, as property values have risen, the cost of mortgages for first time buyers remains high and guarantor mortgages become harder to find, many parents have opted to become joint owners of their child's new home.
However, this kind of arrangement is soon to be hit by the new higher rates of stamp duty supposedly targeted at buy-to-let properties and second homes. As Blake Morgan explored in the recent blog One month to go before the 3% surcharge for residential properties, new higher rates of stamp duty (SDLT) will apply from 1 April 2016 on purchases of "additional properties". If parents are purchasing a property for their child to live in, or even if they buy a property jointly with their child, this is likely to be treated as an additional property and the higher SDLT rates will apply. For a joint purchase like this, we wait to see whether the 3% surcharge will apply to the whole of the price, or to part only.
So what should parents do to minimise SDLT? Should they gift the cash to the child instead? Or lend them the money as a personal loan? Both of these options will keep the purchase costs down but there are risks involved.
Before handing over large sums of cash, parents should consider what would happen if their little darlings get into financial difficulties, get married and then divorced, or if either the parents or the child were to die. All of these could put the investment at risk, and could be much more costly in the long term than having paid the additional SDLT on the purchase. For example, paying the deposit on your child's house would be treated as a lifetime gift to the child and the parent would need to survive seven years from the date of the gift before it falls out of account for inheritance tax purposes.
For those parents who decide to make a cash gift to their child, we would always advise on there being a deed of gift in place to document the arrangement. This will make it clear that it is a gift, not a loan and on what date the payment was made.
For further information on gifting to your child, for property or any other reason, please contact the Blake Morgan succession and tax team.