How to help your family get on the property ladder
4 April 2023
With the sharp rise in interest rates in recent months, we have witnessed an increase in instructions from clients for advice on how they can assist their children or family with their property purchase. We discuss below the way in which you can provide financial assistance to your children or wider family, as well as the tax implications in doing so.
Gifts or loans from parents to children have become increasingly common in recent years, this being a direct result of the rise in house prices and mortgage interest rates. Savills reported that during 2022, 170,000 first-time buyers had family assistance in obtaining a mortgage. This accounted for around 46% of all mortgaged first-time buyers, with the amount of gifts and loans from the Bank of Mum and Dad totalling £8.8 billion. Whatever the sum being paid to the children, it is important that all parties are clear on the nature of the payment so as to avoid any misunderstanding or disagreements at a later date.
Loan
Parents or other family members may prefer that the funds advanced to the child are treated as a loan. This may be because they don’t currently require the funds but don’t feel comfortable in parting with the sum completely.
If this is the case, it is very important that this is evidenced in writing. In its most basic form, the loan agreement should confirm the amount being loaned, the terms of repayment and the amount of interest to be charged (if any).
If the parent were to die, the loan would be treated as an asset of their Estate to be reclaimed from the child by their Executors. If you therefore had more than one child who were beneficiaries of your Estate, this arrangement would ensure equality as the loan sum would be treated as an asset to be distributed between them. In the event the child was not a beneficiary of your Estate, you may wish to consider writing the loan off on death so that the child does not suffer financial hardship in having to pay your Executors. If this is the case, a clause should be added to your Will confirming that the loan should be discharged on your death.
Gift
As is sometimes the case, parents may be content that, now their child has reached an age of financial maturity or perhaps they have settled down and are in a long-term and stable relationship, the loan should be treated as a gift.
In order for the loan to be treated as a gift, you would need to sign a Deed to confirm that the child should be released from the terms of the loan. HM Revenue and Customs’ Inheritance Tax manual specifically states:
“Letters and circumstantial evidence that clearly indicate an intention to absolve the beneficiary of the loan from any liability to repay will not be sufficient to discharge the debt.”
The formalities of a Deed are as follows:
- It must be made clear that it is intended to be a Deed by the parties to it, by describing itself as a Deed or otherwise; and
- Be validly executed (usually by signature) by those persons.
By signing the Deed, you would be making a gift of the funds at the date of the Deed to the child.
For Inheritance Tax purposes, you would need to survive seven years from the date the Deed is signed for the gift to fall outside of your Estate. If you died within seven years, the gift, as well as any other lifetime gifts you may have made, would have first claim against your nil rate band allowance (currently £325,000), but if this allowance had already been used by earlier gifts made within the seven year period prior to your death, the amount given would be subject to Inheritance Tax.
The recipient of the gift would be responsible for paying the tax due on any such gift, unless a clause is included in your Will providing that any tax due on lifetime gifts should be paid by your Estate, so you should consider what you would like to happen in these circumstances when making the gift.
The Birketts view
Before making a payment, either by way of loan or gift, it is important to take legal advice to ensure that you understand the implications of the arrangement, during your lifetime and on death. If payment to the child or family member is by way of loan, make sure to document your agreement to avoid any future misunderstandings or disputes.
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Katey Stephenson
Services
The content of this article is for general information only. It is not, and should not be taken as, legal advice. If you require any further information in relation to this article please contact the author in the first instance. Law covered as at April 2023.