The bank of Mum and Dad
Currently over 80% of first time buyers get financial help from their parents in the form of a gifted deposit. It is often the only way young people can afford to buy their first home.
Whilst the principle of a gifted deposit is simple, structuring it can be far from that.
Conveyancing rules and procedures change frequently. This means that it’s harder for money to exchange hands when looking to buy a property. Money laundering through property is a major problem. Some warning signs of money laundering through the property market include cash-only buyers, payments from a number of different individuals or sources, funds provided by one person and registration in another person’s name.
Gifted Deposit or Loan?
Borring money from family is common when buying a property. You may think that how the money is given doesn’t matter because you are family. However, if you are getting a mortgage, you must be clear on who owns the money being used to buy the property. Your mortgage lender needs to know if the money is a gift or a loan. They want to know if anyone else is going to have a claim over the title of the property they are lending a large sum of money on.
Mortgage lenders do not want to have challenges from parents if they have to repossess and sell the property. Lenders want to know they can repossess, sell the property and repay their loan without anyone else claiming money is due to them. If it is a gifted deposit, the mortgage lender will need a letter confirming this. For loans, the lender must confirm they are happy for a second charge to be registered against the property. Often mortgage lenders do not allow this, especially if it is a high loan to value mortgage.
Loans – Should you Draw up a Contract?
A contract stipulating the full details of any loan from parents must be drawn up. In a recent case, a retired couple re-mortgaged their home to provide their daughter with £90,000. The sum was used to cover legal fees for a property inheritance dispute and allowed the daughter to secure a home left to her by her grandmother. The parents believed they could “trust their own daughter” so they did not draft any formal legal documentation. When they later sought repayment on what they insist was a loan, the daughter refused. She believed the £90,000 to be a gift. The court agreed with her and as a result the parents lost their home.
Tax Implications of Giving a Gifted Deposit to Children
If your parents die within seven years of making a gifted deposit, the money is treated as part of their estate and may be subject to inheritance tax. Parents can give up to £3,000 per year which will not be counted for inheritance tax. In a year in which their child is getting married, they can give a further £5,000 and the same rules apply.
Setting up a Trust
One way parents can help their children in buying a property is by setting up a trust. They can avoid paying capital gains tax and inheritance tax when they buy a home for their child. The child will be able to live rent-free as an adult and will eventually inherit the property.
Setting up a Deed of Trust
Relationships can and do end. Sometimes, it is problematic where gifts are concerned especially when they have been used by a couple to buy property. Parents naturally want to be sure that assets ‘follow’ their child in the event of relationship or marriage breakdown. Without a proper contract in place, this may not happen. A Deed of Trust sets out how money is contributed towards the purchase of a property, and how it should be recovered in the future. This means gifts from parents will go to their child (rather than being shared with the child’s spouse) if a relationship breaks down and the property is sold.
Reliable Legal Advice on a Gifted Deposit
No-one can see the future. If parents are funding their children in any way, like through a gifted deposit, it is important that they have a clear understanding of their own expectations regarding the money. If the sum is a loan, and they will need it repaid for their own financial security, then they MUST seek legal advice. A contract with clear terms of repayment must be drafted. Financial and romantic situations can change. What feels right in one moment may turn out to be a foolish, and costly, mistake in another. Legal advice is never a bad idea when it comes to financial security, especially when taking a gifted deposit from parents.
Contact
Please contact our experienced and approachable team who can advise on your options in relation to property, inheritance and trust matters. Contact Hayley to make an appointment on 0191 243 8167 or email her at hayley.baker@davidgray.co.uk
