Buying a property for your child; know the rules around gifting

All parents hope that one day their children will own their own home but with rising house prices and inflation, parents are being called upon to either house their children while they save for the deposit or gift the deposit themselves.  Jane Cox, Private Client Partner, explains what parents need to consider to safeguard their money for the future, how documents such as a Declaration of Trust can help prepare for eventualities, and explains the tax implications of gifting money to your child.

Inheritance tax and gifting money

Finding the deposit is currently the biggest barrier to taking that first step onto the ladder.  According to research conducted by Nationwide, the Bank of Mum and Dad (BoMaD) is now one of the most popular methods of acquiring a deposit for young people, with parents spending over £6billion so far in 2018 alone.  “According to Legal & General, the average contribution from parents this year is £18,000 with 317,000 homes, or one in four property sales, expected to be funded in this way this year,” begins Jane. 

It is crucial that parents know the financial options available to them before making this commitment, however the same Nationwide research found that 76% of over 55s view gifting rules as confusing with an additional 24% worrying they do not have adequate financial understanding and knowledge necessary to make the right financial decisions. 

“One of the areas of confusion is the tax implication of gifting money,” continues Jane.  “In summary, inheritance tax is not payable on monetary gifts as long as you live for seven years after the date of the gift. There are some gifts that are exempt from this rule, for example an Annual Exemption of £3,000, Wedding Gifts up to £5,000.  However, usually deposits exceed this amount and therefore Inheritance Tax may be payable if you pass away within seven years from the date you gave the money. 

What is a Declaration of Trust?

If, after receiving financial advice, you decide to gift the money for a deposit, your child’s mortgage lender will likely ask for written confirmation from you that the funds are in fact a gift and you do not have any ownership in the property.  With this in mind you will want to ensure that, should the relationship fail with the person your child is buying a house with, they are able to have your money returned.

“This can be achieved through a Declaration of Trust,” explains Jane.  “It is not an easy conversation to raise with your child that their relationship may fail, but it is a practical one.  A Declaration of Trust is a legal document drawn up at the time of the property purchase stating the exact sums of money each party has contributed and what should happen in the event of the relationship failing and subsequent sale of the property.  Having the Declaration of Trust would mean that a possible conflict that would arise from dividing assets in this event would be minimised and your gift would be secure.”

Jane concludes, “While a nice gesture, gifting money shouldn’t come at the cost of your own financial security.  We would always recommend you receive financial advice to discuss your own personal situation, as well as legal advice for both yourself and your child to review the tax implications and any other legal documents that could protect yours and their future.”

If you are considering gifting money to your child for a deposit on a property, or would like to find out more about a Declaration of Trust, you can contact Jane or a member of the Private Client team on 01329 222075 or email privateclientenquiries@warnergoodman.co.uk.   

ENDS

This is for information purposes only and is no substitute for, and should not be interpreted as, legal advice.  All content was correct at the time of publishing and we cannot be held responsible for any changes that may invalidate this article.