Helping your children get on the property ladder
Given the rising house prices and the difficulties currently with securing a mortgage, parents are often keen to do what they can to support their children in making their first step onto the property ladder. How they offer that support however can have very different and often unexpected (and unwanted) tax consequences.
If the funds are loaned
If parents loan money to their children, the mortgage companies will often wish to see a written declaration from the parents that the ‘loan’ is actually a gift by them to their child. Often all parties happily sign this, the children fully with the intention of repaying the loan and the parents fully expecting them to do so. But if one parent dies within 7 years, there is legal documentation in place confirming that they made a gift, which is a potentially exempt transfer for Inheritance Tax purposes. This could lead to Inheritance Tax becoming payable on that parent’s death.
There can also be issues if the happy couple get divorced. Whilst the parents may still be of the belief, with their child, that the funds provided were a loan, again we have legal documentation stating otherwise. This can then be considered as the assets of the couple in concluding the divorce settlement.
If the parents will co-own the property
To secure against the risk of funds leaving the family in the event of the children getting divorced the parents may consider co-owning the property with their child. However, whilst this option provides protection, this presents a number of tax issues, as follows:
Stamp Duty Land Tax (SDLT)
On the acquisition of the property the children would not qualify for first time buyer’s relief for SDLT, because this is only available if ALL purchasers are first time buyers. In addition, if the parents already own their own home, this will be an additional purchase and therefore the 3% surcharge will apply to the full value of the property (not just the parent’s share). In conclusion, where the children may have been expecting to pay no SDLT on the purchase because they qualified as first time buyers, by buying with their parents they could be paying at least 3%, with no SDLT free band at all.
Let’s take an example of a property worth £425,000, which would qualify for first time buyer’s relief under the recent increase, with no SDLT payable at all. If the same property is purchased with a parent as a joint owner, who already owns their main residence, the SDLT cost would become £21,500.
Capital Gains Tax (CGT)
The sale of a main residence is generally exempt from CGT. However, this is on the basis that it is the individual’s only or main residence. If mum and dad buy with their child, who they do not live with, on the sale of that child’s property the gain in relation to the parent’s share would not qualify for main residence relief. CGT could then be payable by the parents at up to 28% on the gain. They would also need to complete a 60 day property return reporting the gain to HMRC and paying the tax.
The position would be similar if the parents later decided to gift their share of the property to the child, perhaps when they became financially able to secure a mortgage themselves. This would be a deemed disposal for CGT purposes, at market value proceeds, which could again create a gain for the parents, subject to CGT. The parents would of course then need to pay the tax on this gain without having received any proceeds.
Inheritance Tax (IHT)
The value of the property interest is an asset in the estate of the parents and would therefore be subject to IHT to the extent it is not covered by the nil rate band or residence nil rate band.
If you would like to discuss your options for assisting your children further, please contact Gemma Hedges on 023 8046 1259.