Being part of the sixth largest lender in the whole of the UK can be a challenge. Especially when you’re completely unregulated and financial qualifications are a rarity. But it hasn’t stopped the Bank of Mum and Dad from lending or gifting over £6.3 billion in 2019.
A report, published in January 2019 by the London School of Economics, found that around half of the funds provided were for deposits for house purchases, with the remainder being used for associated costs, such as stamp duty and legal costs.
While the name contains the word ‘bank’, most parents don’t actually act like one. Few take legal or financial advice on either side of the exchange. There is rarely a written record of the transactions and families tend not to discuss arrangements for repayment. That’s because people, in general, are uncomfortable talking about money.
So, how do we remedy this?
It’s natural for parents to lend a helping hand financially to their children and one concern for those making gifts is that they go to the intended recipient. Though it can feel overly official, preparing a Living Together Agreement (LTA) with the advice of a solicitor is one of the preventative tools available. Creating a legal framework will help to give you peace of mind, knowing that the gifts will remain in the hands of intended beneficiaries.
Stamp Duty Land Tax (SDLT)
There is a higher rate of SDLT for property purchases when the buyer is already a property owner. Tax equal to 3% of the total purchase price will be added to the standard rate of SDLT. Although the rate is nil on the first £125,000 of the purchase price with the standard rate, the same does not apply for higher rates. So it’s worth thinking about who is actually going to make the purchase of the property if you’re planning to help your children out this way.
Buying with a friend or partner
If your child is unmarried and buying with a partner, it’s worth considering an LTA. This provides an opportunity for all parties involved to discuss and record any third party contributions from the Bank of Mum and Dad. An LTA also creates a safety net should the relationship breakdown.
If the child intends to allow another person to live in the property, it’s a good idea to make sure a Tenancy Agreement is also drawn up alongside the LTA in order to set out the exact responsibilities of both parties.
Many parents are turning to joint mortgages between themselves and their children, however it comes with financial implications for Mum and Dad. The property would be taxed as a second home and the additional 3% SDLT would be applicable. If the house was sold in the future, the parents could be landed with a Capital Gains Tax bill of up to 28% on the increased value.
It may be worth considering a Joint Mortgage Sole Owner Arrangement (JSMO) instead, meaning that borrowers can call upon the support of their parents by combining family resources in the short term to achieve home ownership with less difficulty than if they were to apply alone. In short, a JSMO means that the family members join the mortgage in support of the owner, and will not be counted as joint owners, therefore avoiding the additional SDLT charge.
It isn’t easy being part of one of the largest lenders in the country and it’s a given that you’ll want to support your children as they grow up and fly the nest. But by thinking ahead and carefully considering the options, you can give yourself greater peace of mind. If you’d like to discuss any of the issues mentioned, please do not hesitate to get in touch.