With the average house price now at almost £380k, the dream of buying a first home feels ever more out of reach for Generation Z.  As a result, many young people are understandably turning to their parents to help them out.  If you are a parent considering helping your kids to buy a house, there are a number of different ways to do it, and there can be benefits for you in terms of inheritance tax (IHT).  Solicitor Leah Chenoweth discusses the options and the pros and cons of each.

This month Rightmove recently reported that the average property price in the UK has now reached a new record high for the second month in a row, with the average house price now at £380k.  Rather depressing news for those not already on the property ladder, and worrying for parents wondering how their children will ever afford a place of their own. It is therefore no surprise that many in this age bracket are seeking financial help from their parents.

4 ways of helping your kids to buy a house

As mentioned above, as a parent there are various options available to you in terms of to go about offering financial help to your kids, from outright gifts to loans and trusts. 

A Gift

Years ago, mortgage companies would not contemplate anything other than a straightforward gift from parents, possibly as it was seen as being too complicated and involving more risk if there were other parties with an interest in the property. 

However, these days there is more flexibility, and some mortgage providers will consider less conventional options. There are advantages to an outright gift in that it means if you survive 7 years after making the gift, it will be excluded from your Estate in terms of IHT.

The downside of an outright gift is that you have no control over it, and should your child experience or a relationship breakdown, whether married or not, your gift could well be split between them rather than remaining with your child. A way around this could be to insist on a cohabitation agreement if your child wishes to share their property with someone.  This would at least provide some legal protection for your investment although if they get married, a Declaration of Trust would be needed.  Also, if your child has their own financial issues, and faces bankruptcy, this could put their property at risk.

Pros: IHT advantages, easier to set up
Cons: Potentially lack of control without a cohabitation agreement in place prior to any marriage or a Declaration of Trust upon marriage, no protection for bankruptcy

A Loan

Lending your child a sum of money towards their deposit is another option you could choose. Loans of this type would typically be documented as ‘interest free and payable on demand’.  Even though you are lending money to your own child, it is still advisable to have a loan agreement in place to set out the terms e.g. when you expect it to be repaid by, what it is to be used for etc.  A downside of choosing to give a loan rather than a gift is that it remains your asset, so will be considered part of your Estate as far as inheritance tax goes.

Pros: Retain an element of control of your money with loan agreement in place
Cons: No IHT advantage

A Trust

The basic premise of a Trust is that is it is a separate ‘pot or entity’ which doesn’t belong to you and is administered by Trustees i.e. the Trustees are responsible for it and decide how it is spent and who the recipients are.  Therefore, money put into it is technically no longer yours, and therefore is not considered part of your Estate. This obviously has benefits in terms of IHT. The 7-year clock for inheritance tax begins ticking as soon as you put the money into the Trust.  Something you may not be aware of is that if you choose this option, even though you are the source of the gift which has been put into the Trust, you can still be appointed as a Trustee, and therefore retain a degree of control over the pot, whether it is money or property.  This type of Trust is referred to as a Discretionary Trust.

Pros: IHT advantages, if a Trustee you will retain some control
Cons: Vulnerable without a cohabitation agreement in place

Investing together

Some parents see helping their kids buy a house an investment of their own too.  ‘As safe as houses’ as the saying goes, means that people often see property as a very secure place to put their money. Whilst this can often prove to be true, it’s important to be aware of the pitfalls such as Capital Gains Tax and Stamp Duty surcharges.  Another point to note is that there is obviously no scope to minimize IHT, as the property would be considered part of your Estate.  There can also potentially be complications if you and your kids have different ideas in the future about what you wish to do with the property, so it would definitely be a good idea to have a legal agreement in place to set this out and to try avoid family discord in the future!

Pros: Control over your investment
Cons: Exposure to Capital Gains Tax, Stamp Duty Surcharge and IHT

Don’t forget to update your Will

If you decide to go with one of the above, make sure you also look at your Will at the same time to make sure it reflects your wishes.

Get in touch
If you would like to speak to us about helping your kids onto the property ladder, our friendly and experienced team would be pleased to hear from you.  You can contact us by calling 01872 241408 or you can email info@penderlaw.co.uk