Increasing numbers of parents are helping their children onto the property ladder. Money will often come from your own hard-earned savings or from a family inheritance so you will understandably want to make sure that your financial investment stays within the family.
This article looks at options to assist your child’s property purchase and ways of reducing the risk of that assistance leaving the family.
What should I do when providing money to my child for a house purchase?
It is sensible to agree and document whether the money is intended as a gift or loan, or whether you are taking a share in the property. There is risk of complication if your child is buying jointly with their partner, for instance in the event of a future relationship breakdown. However, even if your child is buying alone, future complications can still arise. For example, if they later cohabit with a partner and the partner acquires an interest in the property or if there is a future dispute between you and your child.
Both you and your child should also consider making a Will or reviewing existing Wills and consider the basis on which the property will be held to ensure that the property interest and any rights you have and your estate more generally will pass appropriately.
How can I help my child financially when buying a house?
There are various ways in which you can help your child onto the property ladder, for example:
- Making an outright gift
This means giving the money to your child without retaining any rights to repayment or any interest in the property. Where Inheritance Tax is a concern, it is advisable to document the gift by a Deed of Gift as evidence that the money has been given.
Gifting to a child may necessitate a change to your Will. For example, if you have other children you may wish to give more of the remaining estate to the other children to balance out the lifetime gift given to their sibling. Or you may wish to ensure that the gift is not deducted from your child’s inheritance if that is the intention. Failure to consider and properly document the impact of the gift on your Will can lead to a result which is not in accordance with your wishes as well as the risk of future uncertainty and bad feeling within the family.
- Lending funds to your child
Instead of gifting money to your child you may wish to lend funds. This gives you some protection as you will have the ability to get your money back if needed, for example if there is a relationship breakdown or if your financial circumstances change. It is advisable to enter into a loan agreement to avoid future disputes as to whether the money was a loan or a gift. Legal advice should be sought to make sure the loan complies with legal requirements.
- Acting as guarantor on a mortgage or as a joint mortgage
Some lenders may grant a mortgage where a parent acts as guarantor for their child. Acting as a guarantor means agreeing to be legally responsible to the mortgage provider for repayment of the loan if the borrowers can’t pay. Alternatively, you could be joined as a party to the mortgage, meaning you would be jointly and severally liable for it together with the other borrowers. It would be sensible to enter into an agreement with the other borrowers giving you the right to reclaim from them any monies you pay to the lender (although this will not protect you if they are insolvent). In some circumstances you may be able to take a charge over the property as further protection.
These options avoid having to provide funds upfront to your child, however they could leave you financially exposed if the other borrowers cannot, or do not, meet their future loan repayment obligations. They can also affect your own ability to borrow in the future.
- Buying jointly with your child
This involves you taking a share in the property, typically in proportion to the share of the purchase proceeds you provided to your child. On the one hand, this enables you to receive any future uplift in property price on that share which you can then dispose of as you wish in your Will (or enjoy during your lifetime). However, there are Capital Gains Tax and Stamp Duty Land Tax ramifications, on which advice should be sought.
A Declaration of Trust should be completed to record the shares of each purchaser.
What happens if my child is buying a property with their partner?
It is becoming more common for young couples and/or cohabitees to jointly buy a property together. It is therefore important to consider the risk of some or all of the amount provided to your child being lost in the event of death or if there is a future relationship breakdown (particularly where the provision is made by way of gift).
Where two people own property jointly, they can opt to hold it as “joint tenants” or as “tenants in common”. If they opt to hold as joint tenants, the share in the property of a deceased joint tenant would automatically pass to the surviving joint tenant. This has the advantage of simplicity where the co-owners want to leave their shares to each other, however it would mean that the share of the deceased co-owner could not be left to their own family. Furthermore, the co-owners cannot have unequal shares in the property, so a co-owner making an extra contribution to the purchase price could not take a larger share.
Where property is held by the co-owners as ‘tenants in common’, this enables the joint owners to hold different percentage shares in the property and for the share of each joint owner to be left to their intended beneficiaries if they die via their Will. The co-owners can enter into a declaration of trust setting out their respective shares. They should both consider who they would want to inherit their share and make Wills accordingly.
How can a declaration of trust help protect each co-owner’s property share?
A declaration of trust sets out the interests each co-owner has in the proceeds of sale of the property. This is especially important where one co-owner is contributing significantly more to the purchase price and/or mortgage repayments than the other, for example, with the benefit of a parental gift. The declaration of trust can give one co-owner a larger share of the future proceeds of sale, e.g. to reflect their additional contribution to the purchase price.
It is very important that the parties agree and properly document their respective interests in the property when it is purchased to reduce the risk of future uncertainty and disputes.
A declaration of trust can also set out other points the co-owners may wish to agree in relation to the property, for example what should happen if one of the co-owners wants to sell the property or buy out the other co-owner.
What other issues do I need to consider when helping my child buy a property?
- Tax - the different options for assisting your child will have varying tax repercussions for both you and your child, which should be considered in advance
- Wills - both you and your child should consider the impact of the arrangements on your Wills.
- Your financial position - you should consider the impact of the proposed assistance on your own financial situation; for example, whether you can afford to help and whether you might need the funds back in the future. This will impact your decision as to whether to help and the option chosen. You should consider taking appropriate financial advice.
- Family issues - if your child goes through a divorce or separation, their assets (including the property share you have helped them with) could potentially be reduced by the family courts. There are options to protect against this, for example cohabitation agreements, pre-nuptial and post-nuptial agreements.
We’re here to help
If you are involved in your child’s property purchase, our expert advisers are here to help you navigate the legal and tax implications. We will liaise with our Residential Property Team to fully understand your requirements and ensure the careful preparation of a Declaration of Trust to accurately reflect the ownership of the property, so that both your and your child’s financial interests are fully protected.