Bank of Mum and Dad

Most people aspire to help their families and for many helping their children or grandchildren get onto the housing ladder is not an aspiration but a necessity.

At the end of 2023, research by Legal and General found that parents, grandparents, and other family members helped out in over 318,000 property transactions with £8.1 billion worth of lending. This means that just under half of all homes purchased by buyers under the age of 55 were bought with help from other family members.

We have seen a number of clients help their children with getting together a deposit for a first home or helping them move further up the housing ladder when a bigger home is needed for a growing family.

The arrival of a new member of the family is often a wonderful time with people wanting to help out as best they can, and it can be very rewarding for many parents/grandparents to be able to do so. Increasingly, we find in our conversations with clients that there is a strong desire to “do something now” such as “can we bring forward their inheritance as they need the assistance here and now rather than when I’m no longer around”.

In financial planning, we believe that it is the client who should set the agenda by telling us what is important to them and once we have a clear idea of what their goals and aspirations are we can get to work and see what we can do.

Using sophisticated cashflow financial modelling tools we can visually show to the client the effect that making a financial gift could have on their financial future. While the outcome from a cash flow exercise can never be guaranteed, it does give clients a clear picture of the impact a financial gift can make to their own financial health. This helps them make a more informed decision and, happily, the outcome is often positive so we can agree that some financial help can be provided without the client putting their own financial future into jeopardy.

Cash flow helps identify how much can the client can gift and care needs to be taken here especially if there is more than one child to consider. It is important to try and ensure fairness and equality between children so that one doesn’t feel short changed. However, from what we have seen, provided this is approached sensitively and is discussed openly amongst the family members, it is not uncommon for the child who needs the most help to receive it, especially if there is disparity in the children’s own financial position.

Usually, clients don’t have large amounts of cash readily accessible in their bank accounts so a withdrawal from their portfolios is required. Clearly, it makes sense to draw this as tax efficiently as possible which has become trickier lately with the reductions in the capital gains tax exemption over the last couple of years. Any decent financial plan should have a good level of flexibility and liquidity built into it, but if you are a parent and you would like to help you children onto the housing ladder in the near future, it might be worth considering arrangements that are perhaps slightly less tax efficient but will at least provide access to funds as and when required.

Even having considered all this, serious thought needs to be given to how the financial help is structured both from a practical and legal point of view. It’s great to be able to work with a firm like HCR Law to help in these areas.

Once clients are ready and able to assist their family onto the property ladder, they should consider the best option for achieving this.

Consideration one - Gift of money

Clients can make a gift to their child(ren) of the sum required to afford the property purchase.

This is a very straightforward approach without any immediate charge to Inheritance Tax (IHT) and only a possible charge to IHT if the client passes away within seven years of making the gift.

Additionally, the client will be reducing their estate by the value of their gift (subject to the seven-year rule) and can enjoy witnessing their child enjoy the benefits of their inheritance during the clients’ lifetime.

If the property is being purchased with the aid of a mortgage, most mortgage companies are happiest with the outright gift arrangement.

Consideration two - Declaration of Trust

Consideration one (the outright gift) does not factor in any protection from the client’s perspective. Hence, further protection of the monies may be required, especially if the child is purchasing with a partner or friend.

A Declaration of Trust can be drafted to confirm the amount initially contributed by the child (with the help of their family). The declaration can ensure that this sum returns to the child in the event that things do not work out and that the property has to be sold.

Additionally, the declaration can protect the percentage equivalent of this sum if the child would also like to ensure that any gain is divided in accordance with initial contribution.

For this to work, the property would need to be purchased as tenants in common to demonstrate a potentially unequal ownership share. A purchase as joint tenants would not be appropriate here as it would confirm an equal holding.

Joint tenant ownership also means that the property would pass to the surviving owner on the death of the other owner rather than pass to the deceased’s estate via their Will or intestacy.

Consideration three - Making a Will

Now would be a sensible time for the child to consider making a Will, and for the client to review their own Will. The client may wish to include provision in their Will for gifts to be taken into account when dividing their estate ‘equally’ between children or other beneficiaries.

Consideration four - Cohabitation agreements, pre-nuptial agreements etc.

If the child is buying alone, but perhaps is allowing someone else to live with them, it would be sensible to consider a cohabitation agreement to help to deter any future claims of entitlement concerning the property in the event that the relationship does not work out.

Additionally, if the child is marrying or entering into a civil partnership but wishes to protect this asset, then a pre-nuptial agreement should be considered.

Consideration five - A loan

An alternative to an outright gift would be to loan the child monies. Although this provides more control to the client, mortgage companies do not tend to like this arrangement. Additionally, the value of the loan remains within the client’s estate for IHT purposes, unless or until, the client decides to forgive the loan, in full or in part, at a later date.

Consideration six - Setting up a Trust

Finally, it is possible to set up a Trust to fund a house purchase for a child, again, to provide greater control over the monies. However, if the amount to fund the Trust is more than £325,000 per parent, there will be an immediate charge to IHT at 20%. There are also the administrative costs related to running a Trust including registering the Trust with HMRC’s Trust Registration Service.

Again, the monies funding the Trust will fall outside of the client’s estate for IHT purposes after seven years.

Clients therefore need to consider whether they feel comfortable gifting the monies outright, or whether they still want to have some sort of control of the monies. If they wish for control, the clients need to consider whether that control should be over the gift to their children, or whether they want their child to have control in respect of the gift from a third party.

If you are considering helping your child(ren) to get on the property ladder and would like to discuss the points covered in this article in more detail, please do not hesitate to contact Chris Maguire or Emma McCarthy.

Unsure of the options available to first time buyers? Read more on our insight dedicated to options for getting on the property ladder.