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The Bank of Mum & Dad

23 July 2015

3 options to consider when investing in your child’s property

It is perhaps more difficult than ever to get a foot on the Property Ladder with increasing house prices, rents, student debts and living costs, coupled with most mortgage lenders insisting on a 25% deposit. It is not surprising therefore that many parents feel compelled to provide financial assistance to enable their children to purchase their first home.

The Law Society warns that the majority of people do not think through the consequences of providing this financial support, and it is vital that this act of generosity is well advised and does not result in financial hardship or anxiety. So as a parent, what are your options?

1. A Loan:

Many parents treat the monies as a loan. It is vital to establish the terms of the loan in a formal legal document so as to prevent confusion and distress if circumstances change. It is important to dispel the myth that this would be a complicated legal document; it should be a simple statement of facts setting out on what basis the loan was made, what will happen to the money if one of the parties dies or if you request the money back. This might be of particular importance if your child is purchasing together with a partner and their contributions are unequal. Should you wish to charge interest on the loan, there will be income tax and possibly consumer credit implications. The existence of the loan can be registered against the title which prevents any dealings of the property without your involvement.

If your child is also obtaining a mortgage with a bank, the existence of your loan will need to be disclosed to them at the outset. The bank will need to consent to your loan and will require you to acknowledge in a formal legal document that this will be ‘ranked’ below the mortgage when it comes to monies being repaid.

2. A Gift:

An outright gift is a common way to assist children with a property purchase. This must be reported to any mortgage lender as some lenders require confirmation that you are solvent and will not be acquiring any rights or interests over the property. More cautious mortgage lenders may also insist upon a Deed of Gift indemnity policy being taken out to protect the lender against the possibility that you are declared bankrupt and the creditors claim a share of the property. A reduction in your estate’s inheritance tax liability could be achieved by making a gift, but you must survive for seven years from the date of the gift in order for your estate to benefit.

3. A Declaration of Trust:

The term ‘loan’ does not always sit comfortably with some parents who do not wish to feel that they are burdening their child with further debt, however the “no strings attached” nature of a gift may create some unease. You may wish to ensure that your investment will always be for the benefit of your child and by entering into a Declaration of Trust you can restrict your child’s co-owner from making a future claim on the money. The Deed would specify how the monies are to be dealt with once the property is sold and would prove useful in the event of a dispute. It can be further reinforced by placing a restriction on the title which, as with a loan, will prevent any dealings of the property without your consent.

There are other options available, most notably incorporating differing trust structures, which can give further protection to your family. Each option has contrasting tax implications and tax legislation is always subject to change, so it is sensible to seek both legal and financial advice prior to making a decision.