Increased property prices have put home ownership out of the reach for many. The bank of mum and dad can be the help needed to take that first step on the ladder and is often offered as either a loan or gift. Given at an exciting and happy time in family life, consideration as to what could happen if the situation changes is often overlooked. With families becoming more complex, the need to discuss and plan potential outcomes, protecting assets, is more and more important. So, as a parent, how do you protect your investment?
First of all, be clear whether it is a ‘loan’ or a ‘gift’. If it is a loan, when is it repayable and do you need any protection for the sum you are investing? Whilst such conversations may be difficult they are important particularly bearing in mind the consequences of not ‘protecting’ the loan in the event of a subsequent divorce for example. Protection of the loan in the form of a legal charge, much like a mortgage, reduces risk. However, a third party mortgage lender may be reluctant if the purchase is reliant on another legal charge as well.
Both a loan and a gift may have tax implications from the point of view of both inheritance tax and/or stamp duty. A loan will also form part of the estate of a parent on death and will therefore be subject to tax in the usual way. If the money is a gift, you may want to clarify who exactly the gift is to: the couple or your child. For example, should the house need to be sold with a couple going their separate ways and there is enough equity in the sale to cover the gift, can one party take 100% of that amount or, given that they were given the gift as a couple, should the equity be split 50/50.
Every family circumstance is different and being able to help our children financially is a life long ambition for many. Needing a lawyer to unravel difficulty and conflict later down the line is expensive compared to seeking advice and the preparation of a simple agreement at the outset. Take some advice with your children and make an open, informed decision together. Our conveyancing teams are used to providing clarity and solutions on these issues and work closely with our family lawyers to make sure our advice is not just with a house purchase in mind but well rounded involving the family as a whole. In certain circumstances your child may need their own independent legal advice to ensure there is no conflict of interest.
Should you wish to discuss the points mentioned in this article please contact Heidi Vanlangenaeker, [email protected], telephone 01394 388605.