The Bank of Mum and Dad

Parents will lend their children over £5 billion for property purchases this year, providing deposits for over 300,000 mortgages and buying homes worth GBP77 billion. According to the survey, sponsored by the Centre for Economics and Business Research and Legal & General, parents now finance 25 per cent of all UK property purchases which makes parental loans the equivalent of a top ten mortgage lender.

We see it all the time, and the problems have been worse since the financial troubles in 2008. Today I heard about the first 100% mortgage being offered again but even that relied on someone (usually parents) putting an equivalent of 10% of the purchase price in a related account to ‘guarantee’ the top slice of the lending.

There are problems with parental loans and the arrangements need to be carefully structured. The simplest model, a straight loan, requires parents to decide whether to take a formal charge on the property (which needs the first lender’s consent and narrows down the choice of lenders) or just a separate loan agreement. Such a loan can often scupper a mortgage application and some mortgage lenders insist on formal confirmation that the money is a gift and not a loan.

If parents charge interest, they will need to pay tax on it. The parents could protect themselves by taking part ownership of the property but that can have big issues. They will have to pay 3% Stamp Duty (SDLT) on the whole property and they will also risk having Capital Gains Tax (CGT) to pay on their proportion when the property is sold. And they have to get involved in the mortgage arrangements. Using Trust arrangements can work well, protects the parents’ capital against their children’s bad decisions (in love and money), avoids the extra SDLT and allows Principle Private Residence relief to avoid the CGT. That is probably the best way forward although fully protecting the Trust at the Land Registry is difficult, may need the mortgage lender’s consent (which you are unlikely to get) and so even that is not perfect.

With all this in mind, a lot of parents end up simply giving the money to their children. It is simple and effective, and are you really ever going to have that loan repaid anyway? It gets the money out of your estate for tax and care costs, and the kids will think it’s great. But what if they get in to debt or a relationship that you can see won’t last and then the son-in-law trots off with a chunk of your money? There are many things to think about and everyone has different problems and so, different solutions. Come to see us to work out what is best for you.

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