With house prices still high in relation to earnings, many parents are looking to help their children on to the housing ladder through the “Bank of Mum & Dad”. Here are 3 ways to achieve this, but you need to make sure that you select the right one for you and your circumstances.
- Cash gift
A cash gift is perhaps the most obvious way to help, but not without some important considerations. No Capital Gains Tax (CGT) is payable on cash gifts, and it will be a “Potentially Exempt Transfer” (PET) for Inheritance Tax (IHT) purposes for IHT purposes; this means no IHT to pay now, but IHT could be due if you were to die within seven years of making the gift. However, you will need to be certain that you are comfortable giving away the cash absolutely. Are you confident you will not need it in the future? Or that your child will not squander the cash? How secure is their relationship with their partner? You would not want them to lose some or all of the money if they were to separate.
An alternative may be to lend the money to your child. That way you can still retain some control over the money, demand it back if needed, and protect it if your child splits up with their partner. You could ensure your money is protected by a Declaration of Trust which states that the house is to be sold if you need the cash back and agree fair terms so you and your child are both protected. For further security you may want to consider registering a restriction over the property so that it could not be sold without your consent.
- Second home
If you are fortunate enough to own a second home, this could be gifted to them. However, you must remember that this is a capital disposal for CGT purposes and the property will be deemed to have been sold for its open market value. This can mean that you will have tax to pay even though you’ve received no actual sale proceeds from which to pay it. As with a cash gift, this will also be a “Potentially Exempt Transfer”, subject to the same conditions explained above. The good news, however, is there is no Stamp Duty Land Tax (SDLT) to pay on a gift!
It’s never too early to start planning.
If your children are not yet at the moving out stage, now might be the time to start planning how to help them with the biggest purchase of their life. Regular savings could be put aside in a number of tax efficient investment vehicles including the lifetime ISA, which is available to 18-50 year olds, and offers a 25% bonus to savings funded by the Government if the funds are used to purchase a first home.