In recent years it has become increasingly difficult for first time buyers to get onto the property ladder, and so often these first time buyers become reliant on their parents to enable them to do this.
Historically banks would offer a guarantor mortgage, which effectively means that the parents concerned underwrite the mortgage so that if the child cannot afford to make the mortgage parent, then the parents will have to step in.
These types of arrangements have become increasingly more difficult to find, as mortgage lenders have reduced the range of products they offer, in an effort to limit their risk to potential defaults. I am aware of a building society that operates across the south-west (Wiltshire, Dorset and Somerset) who offer some kind of parent’s guarantor mortgage, but apparently the product could be withdrawn very soon.
With the availability of guarantor mortgages having nearly disappeared, parents are looking at alternative ways of helping their offspring. Some are doing this by providing part of the deposit. But parents who do this need to be aware of the potential tax implications of helping out their children.
Each parent is able to gift £3,000 each financial year, which would not be liable for inheritance tax. Gifts larger than this could be liable for inheritance tax for the first seven years.
Some parents have been in a position where they have been able to buy a property outright in their children’s names. A drawback of this is that as the property would be in the child’s name, and the child may decide to sell it, or raise money on the property and possibly wasting the proceeds. Also if the child marries and then gets divorced, the spouse would have a claim on the property.
Children under 18 are not allowed to own a property. So for parents who want to buy a property for a minor, they would have to buy the property in their own name, and then give it to them when they become 18 or older. But of course the 7 year clock for inheritance tax will only start ticking when the property moves to the child’s name, not when the property was originally bought.
Integrity Pensions and Investments are a firm of chartered financial planners based in Wiltshire who provide Wealth Management to clients across the UK.