Helping you get on the property ladder without the Bank of Mum and Dad
It appears that the “Bank of Mum and Dad” is becoming an increasingly popular avenue among first time buyers for property funding. Research suggests that the Bank of Mum and Dad will lend over £6.5 billion in 2017 to help their children get on the property ladder, a £1.5 billion increase from last year. As a result, the Bank of Mum and Dad is now the 9th largest mortgage lender in the UK!
So, where has this all stemmed from? A key factor affecting this trend is intergenerational inequality, with young adults subject to limited opportunities in comparison to the baby boomers with regards to affordable housing and defined benefit pensions. Research shows on average, parents will lend around £21,600 this year with Millennials being the biggest recipients with 79% of the funding going to people under 30.
However, statistics suggest that in fact, lending from parents is doing more harm than good, nor is it sustainable or equitable for both parents and the young people. It’s understandable that parents want to help get their children on the property ladder, but it’s also one of the causes of our broken housing market.
At Walker Laird, we offer the opportunity for first time buyers to meet with us and chat through the whole process of home buying, including arranging your mortgage. We can put you in touch with a mortgage advisor who will be able to search the market for the mortgage that best suits your needs. To make things easier, the mortgage advisor will offer to meet you in your own home in the evening if you prefer. It doesn’t end there, we will help you negotiate prices with the estate agents, help you submit your offer and help you seal the deal.
We understand that purchasing your first home is costly enough. This is why our initial advice is free of charge and you’ll only pay a fee if your offer is accepted as we start to deal with the conveyancing process.
Sound good?
Further Information
Please get in touch for more information Paisley: 0141 887 5271 and Renfrew: 0141 886 5678.
Helping your children get on the property ladder
The bank of mum and dad is a cliché that’s well worked in today’s economic times, not least when it comes to helping children to get a leg up onto the property ladder. Rising property prices and lenders restricting the level of borrowing has meant that younger people have found it increasingly difficult to bridge the gap between the amount they are able to borrow and the price they have to pay for the property.
Many parents and grandparents who have the financial wherewithal to help need to consider very carefully how to go about providing any sort of assistance to their children or grandchildren.
The option of helping with the deposit without any expectation of this being repaid is straightforward – it’s a simple gift from one to the other.
However, if the plan is to provide a home for the child, then there are potential difficulties that need to be addressed before embarking on such a scheme.
If the title to the property is to be taken in the name of the child, then the child can subsequently do what he or she wants with that property. The child can borrow money and use the property as security or sell the property and keep the proceeds of that sale.
If the child were to run into financial trouble and be pursued by creditors to the point he or she becomes bankrupt, that is likely to lead to the property being sold to meet the debts the child has run up.
Should the child be married and the marriage fail, it is likely that there will be a claim by the spouse for a share in the value of the property.
You should also be aware that if the child is under the age of 16, even though they take the title in their own name, the purchase will be considered as a purchase of an additional dwelling and the rules relating to the Additional Dwelling Supplement will apply. The Additional Dwelling Supplement is a tax of 3% of the purchase price of the property (if the property is purchased for more than £40,000) that is charged when someone buys a property in addition to their current main residence - and is payable in addition to any Land & Buildings Transaction Tax (in England and Wales, Stamp Duty) that may already apply.
Parents and grandparents must think through the options very carefully before embarking on any such scheme.
So, what are the options to secure the position for the parents and grandparents?
There is always the option of buying the property either with or without a loan and then allowing the child to live in it. This would mean that the property would always belong to the parents or grandparents and when it is eventually disposed of, it is likely that Capital Gains Tax will need to be paid on any gain achieved on that sale. If the parents or grandparents already own their own home, there is also the added cost of the Additional Dwelling Supplement.
If the parent holding title to the property were to die, then the property will form part of the estate – and there may be other siblings who are entitled to share in the estate and that might mean that the property must be sold to satisfy that entitlement. Even this method of helping has its problems!
As an option, to try to at least secure the money invested in the property, the parent or grandparent might decide to secure their interest by taking a Standard Security over the property. If this is done, it’s usually backed up by an Agreement setting out in what circumstances any money secured should be repaid. That’s fine as far as it goes because even if there is a problem and the property has to be disposed of, then the money paid to buy it (and potentially any notional interest payable on that money as might be provided for in an agreement) would need to be repaid – but the parent or grandparent might not be able to share in any profit on the sale. If the property is in the child’s name, then the same problems can arise regarding bankruptcy or divorce as mentioned above, but of course, the security would go some way to protect the money invested!
One option that has been getting more attention in recent times is the creation of a trust. The basic methodology is that a trust is created with the parents or grandparents as trustees and the child as a beneficiary. The property is then purchased by the trust with money put into the trust by the parents and/or grandparents. The trust then becomes the owner of the property. The child can live in the property and be sheltered from the vagaries of divorce, separation or bankruptcy as none of these events could have an effect on the ownership of the property – it’s owned by the trust!
The trust can sell the property and buy another property and allow the child to live in it and it can ultimately transfer the property to the child or dispose of it and pass the free proceeds of that sale to the child.
There are also taxation implications that will need to be addressed. The Additional Dwelling Supplement we discussed above will apply to a purchase of this nature if the parents or grandparents who created the trust own their own homes. On disposal,
Capital Gains Tax may apply. It is beyond the scope of this article to enter into a detailed discussion of when Capital Gains Tax will apply so for further information on that we would direct you to the Government website dealing with this topic. You can access that by clicking here. One important point to note is that the money paid into the trust to enable the trust to purchase the property, no longer forms part of the parent’s estate and, as such, is sheltered from Inheritance Tax. Again, to ensure that this is done correctly, you need to take proper legal advice on this.
Contact Us
If you find yourself in such a situation or are currently considering your options, we’d be happy to speak to you about this. Please call us on 0141 887 5271 (Paisley) or 0141 886 5678 (Renfrew).