Many parents help their children buy their first home. However, complications and difficulties can arise if appropriate advice is not taken at the beginning and it is unclear whether the money was a gift or a loan. There are three main ways to assist, and all three can have tax implications for both parties and may lead to uncertainties if unforeseen circumstances arise. Sean Sanders from Thackray Williams Solicitors explains the options >>
An outright gift
In this case, parents need to be aware that if they die within seven years, the value of the gift will need to be brought back into account for inheritance tax purposes. It may mean that the child who received the gift will need to pay some inheritance tax or it may reduce the inheritance tax allowances available to the parents. The effects may be felt when the second parent dies and the reduced inheritance tax allowance exposes more of the estate to tax. Parents may wish to ensure that any gift is taken into account in their wills so that all children ultimately benefit fairly. An unfair distribution of assets can cause resentment among those left behind.
If the parent wishes to have the sum repaid, then it needs to be clear whether any repayments are capital only or whether any interest is attached to the loan. If interest is charged, it may be taxable as income in the parents’ hands. It is important to establish the arrangement in a formal legal document, preferably at the time the property is purchased. This can prevent confusion and distress if circumstances change. For example, if the marriage or relationship of the child breaks down, the parents may wish to protect their contribution. A properly prepared loan agreement can help in these circumstances. It does not have to be complicated, but putting it in place at the outset can save a lot of heartache – and possibly financial loss too.
If a parent wishes to assist their child in purchasing a property but sees investing in the current market as an opportunity to benefit from any future increases in prices, then the parent will want their contribution to be reflected in having a share in the property. Care needs to be taken in drawing up a legal agreement about the proportions in which the property is held, responsibility for mortgage repayments and other outgoings and the circumstances upon which the property should be sold to enable the parent to realise their investment. The parent also needs to be aware of the capital gains tax implications that may arise if the value of the property does increase. There are steps that may be taken to mitigate this liability, although professional advice will need to be taken.