Lawyer's warning following increase in bank of mum and dad home purchases
According to new figures from Savills, the bank of mum and dad funded over £9 billion worth of property purchases in 2023.
The latest research by the property experts found that 164,000 first time buyers had family assistance and the £9.4bn home purchases made represents a twofold increase since 2019.
This latest research suggests that a sharp rise in the cost of renting is one of the factors creating an impetus for pursuing home ownership sooner rather than later. This plus the fact that better mortgage deals tend to be dependent on lower loan to value ratios means that parents are increasingly contemplating contributing to their offspring’s first property purchase.
But the bank of mum and dad creates a dilemma for parents in terms of whether to invest with or gift or loan to their children. And this dilemma is heightened at the moment by a degree of uncertainty and concern about what the impending budget may bring in terms of changes to capital gains tax and the inheritance tax rules, warns private capital lawyer Claire Johnson.
“Making well informed choices is key,” says Claire, a partner with national law firm Clarke Willmott LLP.
“The implications of using the bank of mum and dad can be very different depending on how the parents’ financial contribution is provided and whether it is intended as a gift, a loan, or an investment.”
Mortgage providers also have different approaches when it comes to these circumstances. The default position historically, was for mortgage lenders to insist that any financial contribution from a 3rd party, such as a parent, was signed off as being an outright gift. This keeps things simple for the mortgage lender as there is no one else other than the buyer with an interest in the property.
Claire said: “Making a gift is an opportunity to start a seven-year clock running on removing the value of the gift from their estate for inheritance tax purposes. This comes with the added satisfaction of knowing the gift is being made for a worthwhile cause that should benefit their child for years to come by giving them a foothold on the property ladder. On the other hand, they may or may not have paused to consider that the sum gifted is completely exposed to the child’s choices and to claims by 3rd parties – for example, in the event of a relationship breakdown if their offspring moves in with a partner or marries.
“If parents do want to keep it simple and make a gift it’s good for them to know that there are steps that their offspring can take to protect what their parents have generously given by ensuring they have made a cohabitation or pre- or post-nuptial agreement with any spouse or partner to agree that family gifts are ringfenced. Parents are increasingly encouraging or even insisting upon this ahead of gifting!
“If parents decide to go down the loan route, an appropriate form of loan agreement is a must and clear evidence of the loan is important to ensure the sum loaned is protected from 3rd party claims. The loan can even be secured against the property by way of a second charge (the mortgage lender’s charge will take priority). It is typical to document family loans as interest free and repayable on demand, this keeps the status of the loan simple from a tax perspective.
“The downside of the parent’s contribution being by way of loan is that the debt due to the parents remains an asset of their estate for inheritance tax purposes. Parents might consider waiving the loan sometime later, perhaps when their offspring are older and more settled in life. Any such partial or total waiver needs to be done by way of a deed.
“Of course, another avenue parents may wish to explore is investing in the property with their child. They may feel this still gives them some element of control as well as the possibility of some return on their contribution. There are, however, certain tax ‘downsides’ including a stamp duty surcharge that will apply to the purchase price assuming the parents already own a property. “There will also be capital gains tax on any rise in value of the parents’ share if they give it away or if the property is sold in their lifetime assuming they won’t be living in the property themselves.”
Claire also explains another option for parents is trust planning. This option involves parents setting up and gifting into a discretionary trust for the potential benefit of their adult children and future generations. Although the parents must be excluded from receiving any benefit from the trust assets themselves, they can act as the trustees to decide when and how best to apply the trust funds for the benefit of their children.
The gift into trust will start a 7-year clock running to remove the value given from the parents’ estate if they survive the gift by that period. The parents will be able to exercise their discretion as trustees to make a loan of funds from the trust towards their offspring’s property purchase. The loan is owed back to the trust and therefore not wholly exposed to 3rd party claims in the event of their child’s relationship with a spouse or partner breaking down. The trust can also take a charge over the property as security for the loan.
The trustees might decide to waive the loan at some point in the future. Or the loan could remain in place long term for the eventual benefit of successive members of the family bloodline.
Claire said: “This type of trust planning is becoming increasingly popular. Many high street lenders will now accommodate a 3rd party contribution in the form of a loan from a family trust and 2nd charge over the property in favour of the trust.
“The key message to take away is that parents having the benefit of specialist advice is key to them being able to understand the various options and implications, so that they can make an informed choice about what is right for them and ensure the relevant paperwork is in good order.”
Claire Johnson has more than 30 years of legal and tax experience, specialising in helping families and businesses achieve their wealth and succession planning goals.
Clarke Willmott is a national law firm with offices in Bristol, Birmingham, Cardiff, London, Manchester, Southampton and Taunton and is this year celebrating its 135th anniversary.
For more information about Clarke Willmott’s wills and probate services visit Wills, Trusts, Probate & Estates Solicitors – Clarke Willmott
