28th April 2022
First-time buyers today must find, on average, a deposit equal to a year’s salary. With almost half relying on parental assistance, the ‘Bank of Mum and Dad’ has never been so popular or so necessary. House price affordability and the phasing out of the Help to Buy scheme make this trend set to continue.
‘It is natural to want to help your children onto the property ladder if finances permit,’ says Rachel Silvester, head of the residential property team at Myers & Co Solicitors. ‘However, if you are considering making a financial contribution to help your children buy a house or flat in Staffordshire or Cheshire (or indeed elsewhere), make sure you get the right professional advice first and ensure there is a documented agreement to reduce the risk of problems arising later.’
If you have built up savings, you may prefer to help your child now rather than pass on those assets through inheritance, but it is important to make sure you will still have enough left for your own needs. Remember these could change over time, for example when you retire or if you need long term care.
We often find talking about money with other family members difficult, but it is vital that you and your child are clear about the nature of any financial support. If you are not, problems can arise later. For example, you need to consider and talk about what happens if:
Property ownership is a long-term commitment and over time informal arrangements, made in good faith, may be forgotten or break down. While nobody likes to consider their own mortality, having a written record will also help with the administration of your estate and reduce the risk of misunderstanding or a dispute between family members. Using a solicitor will ensure your arrangements are clear and work legally. It can also make those awkward family discussions that much easier.
Deciding at the outset whether your contribution is a gift or a loan is key. This will affect your own financial planning, and your child’s ability to access certain mortgage products. Most lenders will accept parental contributions towards a deposit but will view a loan differently, often treating it as a potential liability. In either case, you should document your contribution.
As your solicitors, we can ensure the correct paperwork is in place and your interests protected. For example, if you are lending money, the preparation of a legal charge and its registration at the Land Registry could be the most secure way to protect your interest, ultimately allowing you to force the sale of the property should the borrower fail to repay the loan.
This may seem very formal, but it can make good sense in some circumstances, for example if you need the sum repaid by a certain date to finance your retirement plans. While your child may have every intention of repaying at the time of the loan, circumstances can change, for example through relationship breakdown or premature death. By including a suitably worded restriction, the property could not be legally transferred without your consent or repayment of the outstanding loan.
If your child is taking out a mortgage, not all mortgage lenders will agree to another charge. Others will want to make sure their charge ranks in priority and may require you to complete a deed of postponement; in the event of default, they will be repaid from any net sale proceeds first. You may also need to show them you have taken independent legal advice. So, it is a good idea to check their requirements early on, then we can help you factor these into your plans.
If your child is buying with a friend or partner, our property lawyers can prepare a deed of trust to take account of your contribution and ensure that you can influence the treatment of its value in the future. For example, if the property is sold a share of the proceeds reflecting your gifted contribution could be attributed to your child instead of it falling into the general pot for distribution between the co-owners.
If you are making a significant financial contribution, you may also want to protect it from the risk of a potential marriage break-up. A pre- or postnuptial agreement could help here, setting out the treatment of your contribution. Although a court will not always be bound by this, it should take it into account in any divorce settlement.
Instead of contributing a lump sum, you could help your child by becoming a parental guarantor (or a joint borrower). However, remember that in either case you would potentially be liable for all the outstanding debt which could put your own home at risk.
A recent innovation is the springboard mortgage. This allows someone with a small deposit, typically five per cent, to borrow if their parents place an equivalent proportion of the property’s value, typically ten per cent, in cash in a deposit account as security. The mortgage lender can access those savings to make up any missed payments. In a worst-case scenario, you could lose the entire sum. However, a springboard mortgage could help your child buy their own home and earn you interest at the same time.
As well as stamp duty land tax, if you have a beneficial interest in the property or intend to share in any uplift in its value, you should carefully consider your potential liability for capital gains tax. A lump sum contribution should not create any immediate liability for inheritance tax. However, if you die within seven years, HMRC could class it as part of your estate.
Your contribution could also affect your eligibility for funding for long term care from your local authority, who could argue you have intentionally deprived yourself of your assets. This may seem like a remote possibility now, but circumstances can change, and it makes sense to consider future scenarios.
If you want to help all your children buy their own home, it may be worth considering a family trust or carefully documenting individual gifts. This can reduce the risk of challenge if you gift money to your last child to buy their own home when your health has started to decline.
Only 14 per cent of parents who contribute towards their child’s house purchase seek advice from a financial advisor, but this could help you to decide if a particular arrangement is right for you. You should also discuss your plans with our residential property solicitors, who will be aware of the legal implications of each course of action. For example, how you structure any joint borrowings could impact the rate of stamp duty land tax payable on the purchase.
If you are considering helping your child financially, please contact us. We can advise you on the immediate issues surrounding your contribution, and how it could impact on your life plans. By understanding your individual needs, and wider relationships, we can help you and your family enjoy a future of successful home ownership.
For further information, please contact Rachel Silvester in the residential property team on 01782 525016 or email email@example.com.
This article is for general information only and does not constitute legal or professional advice. Please note that the law may have changed since this article was published.