A leading private client lawyer from Shropshire has said that it is vital that people seek out the best form of agreement before providing money to help with the purchase of a home.
An uncertain future
"New research indicates that parents will provide their children with over £5 billion for property purchases this year, providing deposits for over 300,000 properties," says Fiona Barnes, private client partner at Wace Morgan Solicitors, which has its head office in Shrewsbury.
"We would encourage people to take legal advice about the best way to help their child's purchase – whether it be a mortgage, as a gift, via a trust or as a co-purchase - and to fully document it for proper reference as nobody truly knows what the future may hold where family relationships are concerned."
The bank of mum and dad
According to a survey, sponsored by the Centre for Economics and Business Research and the Legal & General financial services group, parents now finance 25 per cent of all UK property purchases. Collectively, parental loans are the equivalent of a top ten mortgage lender.
However, parents tend to provide a much smaller part of each purchase than would a commercial lender. The average parental contribution is only £17,500 or seven per cent of the average purchase price.
Mrs Barnes continued: "Grandparents are also regular contributors, putting money into about one in ten parent-supported purchases, so the same applies to them about seeking out proper legal guidance on the transaction.
"Depending on the type of arrangement made, parents not taking sufficient care could find themselves with a tax problem so financial advice is also imperative."
Above: Fiona Barnes of Wace Morgan Solicitors
A gift or loan
Parents may intend to make a simple gift of the funds, which can save inheritance tax, but they may prefer to protect their contribution to be fair to other children, or in case their child separates or divorces from their partner.
The simplest model, a straight loan, requires parents to consider whether they take a formal charge on the property or whether there is a separate loan agreement. If interest is charged on the loan the parents will need to pay tax on it. However, if they raise the money from their business or from a buy-to-let property, tax relief for the interest they pay may be possible.
Funding the purchase by taking partial ownership of the property provides parents with more security for their investment, but can come with greater tax costs. If the parents already own their own home, the part purchase will mean that they are buying a second property subject to the three per cent stamp duty land tax additional charge on the whole value of the property. They will also have capital gains tax to pay on their proportion when the property is sold.
"Buying via a trust may give a more secure arrangement without the tax downsides as it could avoid the additional three per cent stamp duty land tax charge and provide full main residence relief, but advice around the type of trusts for legal and tax reasons is essential," Mrs Barnes stressed.
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