Centre for Economics and Business Research, in conjunction with Legal & General, has recently published a report that states parents in 2016 will finance 25 per cent of all UK property purchases. Parental loans will, therefore, be the equivalent of a top ten mortgage lender.
The so-called “Bank of Mum and Dad” will provide £5 billion in deposits for over 300,000 mortgages. Grandparents are also reportedly contributing in around 1 in 10 transactions.
For the parents it is important, from a legal and tax point of view, to consider whether these funds are classed as loans or gifts and whether they are documented as proportions of equity (perhaps by way of a trust) or as loan agreements.
Cash gifts are not usually taxable in the first instance, but inheritance tax (IHT) should be considered as any gift will be classified as a PET (see our earlier blog on this topic).
If parental loans are given to children, the parents should normally execute a loan agreement recording the same. They will also need to consider whether the loan is to be secured against the property by way of a charge (which will often require the lender’s consent). Charging interest is another factor to bear in mind; if interest is going to be charged on the loan, the parents will need to pay tax on that interest.
Buying the property jointly will provide more security for the parents, but they will be stung with additional stamp duty land tax (SDLT) rates where they already own another property. Similarly, they will be liable for any capital gains tax (CGT) on any increase in their share of the value of the property when the property is eventually sold.
It could be a more favourable route to purchase by way of trust. This could avoid the additional rates of SDLT and provide the security associated with registered charges. However, it is important that legal and tax advice on the types of trusts is sought before implementing any such arrangement.
There are many legal and taxation issues for the well-intentioned Bank of Mum and Dad to consider before making parental loans or gifts, therefore to discuss these matters further, please contact our tax and trusts team, Raveet Phull Carolle Harris or Nicole Marmor.