A recent report by the National Housing Federation stated that those born in the 1980’s face an uphill struggle to buy a home. Soaring house prices over the past decade and the strict lending requirement for a deposit of at least 10% (or 5% with the government’s ‘Help to Buy’ scheme) mean that according to the study, a shortage of affordable housing will see some 3.7million young people living with their parents by 2020.<!–more–>
With parents and grandparents looking to help their grown up children in whatever way they can, it has become increasingly common for first time buyers to turn to the ‘Bank of Mum and Dad’ (or Grandma and Granada) for help in raising the required mortgage deposit. Indeed according to the Council of Mortgage Lenders around 80% of first-time buyers aged under 30 are receiving some form of financial help from their parents.
One way in which parents and grandparents are looking to help is to “advance an inheritance” to children or grandchildren, helping them to climb onto the first rung of the property ladder by using this lump sum as a deposit. Bear in mind however that there are limits as to how much you can give away, and while inheritance tax is free on gifts under a certain amount, should you die within seven years of making such a gift, the money will be considered part of your estate.
While using your nest-egg to help in this way can seem like a good way to provide a much needed helping hand (particularly with the interest rate on savings accounts so low) a word of caution is needed.
What happens for example if you gift a parental mortgage deposit to a child/grandchild and a partner subsequently moves in? If that relationship or marriage then breaks down, you could discover that your “gift” becomes part of any financial settlement, with half required to be paid to the ex-partner.
Prior preparation can ensure your generosity is safeguarded. Financial gifts of this nature can be protected and it is therefore important that when the new home is bought, the conveyancing solicitor is made aware that the deposit has been given by a family member, that the deeds should reflect this, and that an appropriate Declaration of Trust is prepared. If this has not been done at the outset, there may be other ways for the monies to be protected on separation, but this can prove more difficult.
An alternative is to make any such payment by way of a loan rather than gift and to have a suitable loan agreement drawn up which can be secured against the property, or if an equitable charge (a security interest granted by a debtor which gives the creditor the right to recovery of the loan amount in case of non-payment) registered with the deeds.
Any such loan could be interest free and the parent or grandparent may not even really expect that it would actually be repaid, but in the event of a breakdown in their child or grandchild’s relationship, they will at least know that that payment will fall outside any dispute.
At Linder Myers, we are experienced in dealing with protecting gifts or payments of this nature. If you would like advice on this issue please do not hesitate to contact me to discuss your options in more depth.