How do I help my children to get onto the property ladder?
Many parents are keen to help their child or children get onto the property ladder and don’t want them to have to wait for their inheritance. Recent studies have shown that parental lending accounts for up to 25% of all mortgages to first time borrowers. The first thing to remember is that under the mortgage affordability rules the loan must be disclosed to the mortgage lender. This means that the loan will be treated as a debt owing which could affect your child’s credit scoring and present a problem in raising a mortgage.
What are the options and what do you need to consider?
The safest way for parents to protect their investment is of course to put their names on the proprietorship register or to buy the property in trust for their child. However, parents rarely want the complication of co-owning a property with their child and his or her partner and of course there are also capital gains and inheritance tax implications to consider. Your child should also be encouraged to consider the legal ramifications of being in a relationship and their relationship potentially going wrong.
So, co-habiting couples may consider entering into a living together agreement in order to set out the basis on which they are going to co-habit and in particular what contributions they will each make to the household, their respective if any interests in the property and how the initial deposit from mum and dad will be treated. By contrast married couples have a whole range of financial obligations and responsibilities between them irrespective of whether a property is solely owned or jointly owned.
If the couple are intending on getting married they may even go as far as considering a pre-nuptial agreement to reflect and record the advancement of money from parents and to state that the money should not be shared in the event that the marriage breaks down. Whilst the parties may have stated their beneficial interests in a property by way of a declaration of trust this can, if appropriate, be overridden by the Courts depending on the financial needs of the parties and that of their children. The couple might consider entering into a post-nuptial agreement to record the contributions brought into the marriage through financial assistance from a parent.
The reality is that at the time there will usually have been little discussion between parents and their child as to how the payment towards the deposit for the purchase of the family home should be treated. More often than not it was a gift or perhaps a gift with strings attached. And more often than not there is nothing in writing and there are no terms attached making it very difficult for parents to argue that they are seeking repayment of their money.
If parents don’t intend an outright gift of money then they might consider setting up a formal trust agreement or loan agreement. If the money is to be an outright gift then the simplest and most cost-effective way of protecting a co-habiting couple’s respective interests in a property is for them to hold the property as tenants in common opposed to joint tenants and to make a declaration of trust as to their respective beneficial interests in the property.
Why is it important to take professional advice?
Not only is it imperative that parents and their children should have a very clear understanding from the outset of whether the money is a loan or a gift but it also goes without say that parents should consider the potential inheritance tax implications and children should be advised to make a Will.
Both parties would be well advised to take proper legal advice. There are legal solutions which will help to protect family money and also to avoid any disputes on termination of a relationship irrespective of whether a couple are co-habiting or married.
If you would like to discuss any of the issues addressed in this article then please do contact a member of our private client team who would be happy to help.