Parents warned over Bank of Mum and Dad tax risks
A report has cast light on the risks parents face when helping their children to buy a house.
The guide from insurer Royal London highlights potential tax risks, for example if the parents are named on the deeds of the property purchased with their child then they will likely be liable for the higher rate of stamp duty which applies to second homes.
As of April last year, second homes are subject to an additional 3% stamp duty rate; a £150,000 purchase of a second home incurs a stamp duty bill of £5,000, compared to £500 for a first property.
The tax burden doesn’t stop there, as parents could also find themselves with a capital gains tax bill if the property is sold at a profit at a later date.
Other issues covered by the report include the potential impact of falling house prices, which could eliminate the chances of the parent ever getting their money back, and changes in the relationship status of the child, which could cause further disputes about precisely how much of the house is owned by each party.
A report earlier this year by Legal & General and Cebr suggested the so-called Bank of Mum and Dad will lend more than £6.5bn this year in order to help their children get onto the property ladder, up from £5bn last year, with parents involved in one in four property transactions.
Parental help comes in different forms
Royal London’s guide highlights the fact that parental assistance can come in a number of different forms, besides simply a gift of cash to help supplement a deposit.
For example, parents can act as guarantors on the mortgage – though the number of lenders offering these deals has declined in recent years – or take out a joint mortgage alongside the child.
Parents can also raise money through their own home via a second mortgage or equity release, or use their savings as a guarantee through products like the Family Society’s Family Mortgage, which allows the child to secure a cheaper rate of interest on the loan.
See YourMoney.com’s How to help your child buy a home without handing over stacks of cash for more information.
A further option is for parents to help provide funds for their child to open a Lifetime or Help-to-Buy ISA. Both of these forms of tax-free savings accounts include government bonuses when the money saved is devoted towards purchasing a first property.
See YourMoney.com’s Help to Buy ISA vs Lifetime ISA guide to see which scheme may be best for first-time buyers.
‘Lending or gifting money is a major financial commitment’
Helen Morrissey, personal finance specialist at Royal London, said that with house prices rocketing in recent years, it has become much harder for first-time buyers to get onto the housing ladder, which is why parental help has become more common. However, she emphasised it is crucial that parents understand that lending or gifting money in this way is a major financial commitment, and parents must understand the possible implications.
She said: “Arguments over whether money needs to be repaid, or over what time period, have the potential to cause considerable harm to the parent/ child relationship. It may seem very formal but all parties should consider taking legal or financial advice and if needs be get something down in writing. Taking this approach can bring much needed clarity to the process and save both parties a lot of grief.”