I noticed an article on the BBC website recently on the bank of Mum & Dad starting to feel the pinch when helping their children get on the property ladder.
Having blogged about this topic back in 2017, I was interested to read that the average parental contribution is down 17% year-on-year, reduced from £21,600 to £18,000 (research from Legal & General L&G). However, more than one in four buyers is still expected to get financial help and the bank of Mum & Dad is still a prime mover in the UK housing market (L&G).
Housing in the UK is very expensive and in short supply. Average house prices, especially those in the most expensive areas (that’s you London), are quite simply out of reach for people not on a sky-high salary. Leaving a generation of people stuck in rented homes or living with parents whilst they build their careers.
Enter the bank of Mum & Dad…
With over 317,000 expected housing transactions this year requiring help from parents, this bank is booming. As you would expect, contributions are higher in London with more buyers receiving help (41%) and the highest amounts (£31,000 compared with £11,000 in Scotland).
This does not paint a pretty story for parents or their children trapped in renting. Nevertheless, parents feeling an economic pinch are continuing to help their children buy a home.
Things to consider
If you are planning on helping your children to buy a home, I would always recommend that you seek legal advice to ensure that the interests of all parties are protected.
Is your son or daughter married, planning to marry or cohabiting? If yes, what would happen if the relationship breaks down and the couple split up or divorced?
Dependent upon the specific facts of the case there are various ways in which legal and beneficial interests in property can (and indeed should) be protected: whether that be by way of cohabitation, prenuptial or postnuptial agreements, a legal charge or a Declaration of Trust.
It is also worth remembering that if you are to become a shared owner of your child’s property and you are also a homeowner, your interest in your child’s property will be regarded as a ‘second home’ which means you will be charged a higher rate of Stamp Duty Land Tax on the transaction.
Is the money a gift or loan?
If the money is to be gifted it is important to be aware that the gift could incur an Inheritance Tax Charge. The same is true for a loan. It is important therefore that advice is sought from a specialist financial adviser who can assist you in relation to Estate planning and possible tax consequences.
If the money is advanced as a loan, you must consider whether a formal loan agreement needs to be created to agree on terms and conditions.
This might all seem particularly formal, however, in taking appropriate legal and financial advice will assist in providing clarity and preventing a future dispute arise.
This issue was highlighted recently in the press as a mother and father have reported “losing” £90,000 – the parents’ case was that the advance was a loan, but their daughter insisted it was a gift.
No matter the circumstances, therefore, it is prudent to ensure that at the outset of any gift or loan being made from the Bank of Mum & Dad that early legal, financial and tax planning advice are sought – doing so before making decisions now can save a lot of emotional and financial cost for the whole family in the future.
Thank you also to Christopher Birch for contributing to this article.
The Inheritance Tax risk is best covered by one-off insurance.
The divorce problem is something else! It is essential to have a trust in place which will bind any son/daughter-in-law you have at the time or acquire later. There is no place for sentiment here: people generally want to help their own issue – not the people they marry!