How can the “Bank of Mum and Dad” help millennials to get on the housing ladder?
For many young people the biggest challenge facing them is how to get onto the housing ladder. Average property prices are sky high (especially in the South East) and banks demand sizeable deposits before granting a mortgage. In May this year Tim Gurner, an Australian millionaire property developer, provided some helpful advice for millennials by suggesting that they stop spending money on smashed avocados and coffee. Back in the real world, many first-time buyers turn to their parents for financial help – a recent report from Legal & General predicts that parents will lend their children more than £6.5bn in 2017.
Parents who are in a position to help have a choice of lending money, gifting money or taking a stake in the property.
This is the simplest option if the “Bank of Mum and Dad” can afford it. If they survive the gift by seven years the value leaves their estates for inheritance tax purposes (“IHT”). However, they cannot retain a benefit in the gifted funds and will lose control of how the money is used. This can be a problem if the parents do not want their child to have “too much too soon” or if they want to protect the funds from a divorce or bankruptcy.
Loans are useful if the parents may need to be repaid at some point in the future. Securing the loan against the property provides protection. The parents could convert the loan into a gift if they no longer require the funds.
Any interest must be declared for income tax. If a parent dies, any outstanding amount will form part of the assets in their estate which can cause complications if the borrower is not the only beneficiary of the estate.
Banks are uneasy about agreeing to a mortgage if there is also a loan from the borrower’s parents. High street lenders generally want confirmation that any balance of funding is from the borrower and no one else and may require additional assurances.
Take a stake in the property
Parents can take an interest in the property via a Declaration of Trust. They will receive a share in any increase in the property value on sale (subject to Capital Gains Tax).
Since April 2016, a Stamp Duty Land Tax surcharge of 3% is triggered on the whole purchase price if the parents have an interest in another property (as is often the case). This makes this option less attractive and so loans are more popular with parents who do not wish to make a gift.
The “Bank of Mum and Dad” may be the best solution for someone trying to get on the property ladder (whilst still enjoying their avocados and coffee) but there are complexities to consider. A solicitor can advise on the best options in your circumstances.
If you would like more information, Stephen can be contacted on 01892 506 341 or email firstname.lastname@example.org.