The Bank of Gran and Grandad
Soaring property prices have long been a factor in the ‘Bank of Mum and Dad’ helping children with property purchases. The financial disruption experienced by so many during the pandemic, coupled with the stamp duty holiday, has also seen the ‘Bank of Gran and Grandad’ becoming a major contributor to helping younger generations onto the property ladder.
According to equity release provider Key, older homeowners released almost £755 million of equity in 2020 to help younger members of their family meet a range of costs including supporting them with an average of £42,500 to use for a house deposit. This is mirrored in a survey from Legal & General who found that over half (56%) of respondents making a first-time purchase in 2020 did so using a financial gift from family or friends.
Careful consideration should be exercised when gifting or loaning money to younger family members to try and prevent any future disputes and to minimise Inheritance or Capital Gains Taxes.
The first thing to be clear about is whether the money is a gift or a loan.
Stating the obvious, but make sure no one is under the wrong impression if the intention is for the money to be paid back in the future.
If it is a gift, it can be beneficial to have an agreement drawn up to safeguard the money and ensure it remains with the beneficiary in the future. For example, if the person is buying with their partner but they then split up and the property is sold, what happens to the part of the proceeds that were originally the gifted money? A Cohabitation Agreement is one of the ways to ensure the gift stays in the hands of your intended family member.
If it is a loan, this could be classed as an outstanding debt by a mortgage provider and go against their mortgage application. Repayment arrangements should be agreed by both parties.
Whether it is a gift or a loan, a Declaration of Trust would be useful if the family member is purchasing the property jointly with someone else in order to record their contribution and protect any unequal shares in the property.
It is always sensible to remind the family member to update their Will or encourage them to make one now they have ventured into this adult territory of being a homeowner.
Will you need to pay Inheritance Tax?
Should you pass away within 7 years of making the financial gift, Inheritance Tax could be payable. There are some scenarios where IHT doesn’t apply, for example grandparents are able to gift £2,500 each as a wedding gift. The gift may also be covered by the annual exemption (£3,000 per person which can be carried forward from the previous tax year if unused).
Advice should be sought before making any large financial gift, and an agreement reached as to who would pay the Inheritance Tax if some became payable.
Does a joint ownership solution work?
Some families decide the best course of action for them is joint ownership of the property to enable an element of control and ownership of the property asset. Here again, a Declaration of Trust would be useful.
There are two other key things to be mindful of here;
Stamp Duty Land Tax – the SDLT payable increases when one of the purchasers owns another property.
Capital Gains Tax – buying a property with a family member when you already own your own property is classed as an investment and therefore subject to Capital Gains Tax should the property be sold in the future.
Ann-Marie Matthews is a solicitor in the private client team at Barker Gotelee, Ipswich Solicitors.