Could helping my child to buy a home financially benefit us both?
As property prices continue to soar across the UK, the dream of owning a home appears to be slipping away from a vast number of under 35’s. Unsurprisingly, the 'Bank of Mum and Dad' seems a very attractive option.
A recent Legal & General and the Centre for Economics and Business Research study has shown that a quarter of all homeowners under the age of 35 have received some sort of financial assistance from family or friends and this figure is set to rise in the coming years. But could it actually benefit both parties?
Lending or gifting money to a loved one can be an effective way of tax planning during one’s lifetime, assuming it is made willingly and the perceived investment is worthwhile. What is vital though is to ensure it is properly documented and the tax consequences understood.
One option would be to loan the money. Any such agreement should be in writing, clearly stating the interest rate, term of the loan, the repayment plan and be signed by both parent and child. Although not a strict formal requirement, such evidence is important in a practical sense; for example, if one party to the arrangement dies before the loan is completely discharged. For Inheritance Tax (IHT) purposes, the loan value would remain part of the parent’s estate at death and the aggregate estate would be taxed in the normal way (i.e. 40% over the Nil Rate Band or IHT free allowance).
The interest on the loan payments constitute ‘income’ and are therefore subject to Income Tax. However, any such interest may be covered by an individual's annual Income Tax exemption.
If the loan is non-interest bearing or is to be waived on death, HMRC may view the loan as a gift – an outright gift is the second option and may be preferred in certain circumstances. Here, the funds would constitute a Potentially Exempt Transfer (PET). If the parent survives for seven years, the entire amount will fall outside of his or her estate for IHT purposes. However, if he or she dies within that seven-year period, the child may need to pay tax on the value of the gift (depending on the size of the net estate).
Lastly, if parents wish to invest in a property alongside a child, a Declaration of Trust should be put in place to document their respective beneficial interests.
It is important that 'Mum and Dad' assess what funds they can realistically afford to loan or gift to a child, before entering into any of the above arrangements. 'Mum and Dad' should also think about the consequences of death, divorce or bankruptcy of their child, hence the need for proper advice and clear documentation.
If you would like any further information on lifetime IHT planning or Declarations of Trust, please contact Elysa Jacobs or another member of our Succession & Tax team.