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Helping your child onto the property ladder
First time buyers are finding it increasingly difficult to take that first step onto the property ladder, mainly due to the high deposit required. Parents are therefore stepping in to support their children financially; however it is important they take certain advice before doing so, which is where we can help.
We are able to help you understand the responsibilities when it comes to gifting or loaning the monies to your children, and also compliance with Money Laundering Regulations.
Gift of monies
As parents, if you decide to gift the monies to your children, there is certain evidence required in order to do so:
- confirmation that the monies being provided are solely a gift;
- written confirmation that you, as parents, require no interest in the property;
- ID documents to comply with the money laundering regulations;
- evidence of the source of funds: we will need a recent statement within the last three months to demonstrate that there are relevant funds to provide a gift of monies.
When your child is purchasing a property with a partner or friend, you need to consider who you are giving the money to. You may assume that it is just being given to your child and not the other person, and if the parties split up your child will get their money back. However, this may not be the case as it depends on the arrangements made between your child and their joint owner. It may be appropriate to consider legally binding documents, such as a Declaration of Trust.
Loan of monies
A loan of monies is quite different to a gift, but evidence is still required before any movement can be made:
- has a loan agreement been drafted;
- what are the terms of the loan:
- what is the length of the loan;
You should always use a solicitor to draw up a loan agreement with your child before lending this kind of money. Whilst your family are unlikely to run away with the money, life can get more complicated when children look to set up home with their partners or decide to get married. If things go wrong and the couple decide to separate you could lose out.
There are several issues to consider in these circumstances. The position of the loan should be covered in your Wills, particularly if there are several children in your family. There are important tax issues to bear in mind and in most cases it will be necessary to tell any bank or building society lending on the property about the loan.
Taxation of gift or loan monies
A gift is unlikely to be subject to Inheritance Tax because it is a potentially exempt transfer; provided you survive by 7 years there will be no Inheritance Tax implications. However, subsequently if parents move into the children’s house the pre-owned assets tax regime can “bite back” and further advice should be taken at the time.
Loans which are linked to the percentage of value of property will be subject to Capital Gains Tax and over a period of time this can be considerable. Legal or accountancy advice should be taken at the time of giving a loan and also at the time of redemption.
While helping your children onto the property ladder is an extremely generous gesture, as you can see, there are many things to consider.
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