The Bank of Mum and Dad

Most parents will naturally want to help their offspring onto the property ladder and with the price of property these days it is often a requirement to have the extra funds even when a mortgage is being obtained.

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Chances are then that parents will be asked to provide funds towards a son or daughter’s first purchase.

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This can create a number of issues which will require advice and action.

Mortgage

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If there is a mortgage involved, then the Lender will require the provision of funds to be a gift with absolutely no interest in the property being taken by the parents or other relation gifting the money. This therefore means there is no way of protecting those funds by way of a second charge or even a Declaration of Trust giving third parties an interest in the remaining equity of the property in question. This leaves parents in a bit of a dilemma especially if there are perhaps siblings who may also want the same treatment at a later date. The donors will be asked not only to sign a letter confirming this money is to be treated as a gift and so effectively lost in the event of a repossession, but also must provide evidence of identity plus confirmation of the source of the funds. A Bankruptcy search will also be undertaken to ensure these funds are not being disposed of in order to evade creditors.

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Tax

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If the money is given purely as a gift there may be tax implications and it is strongly recommended that donors take advice from a tax expert.  Such expertise is available from Edward Hands & Lewis should this be required.  If on the other hand the money is being provided as part of a loan to children or there is a declaration of trust involved, or there is joint ownership this could give rise to liabilities for SDLT (stamp duty).  Any ownership or interest  in a second property gives rise to payment of stamp duty on the higher rate and therefore this needs to be investigated to see if any implications may occur.  In most cases, however, if the donor is selling and buying a main residence there is an exemption available in this case and such an exemption can be claimed up to 3 years after the purchase taking place thus enabling the sale to take place much later if that is something which is possible.

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Gift advice

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Gifts can give rise to issues in their own right, not only from a tax point of view but also under the Insolvency Act 1986 (as amended).  Any gifts will be scrutinised in the event of a donor becoming bankrupt after such a gift is made.

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Gifts can of course cause problems within families if one sibling does not feel they are being treated the same as another for example.

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It is also not possible to expect a gift to be returned and there would be no recourse to the courts for the return of such a gift in the event of a break down in the relationship for example.

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Any gifts should be considered in the light of inheritance as obviously a gift to one party could have consequences on the remaining capital for division between beneficiaries in the event of death and this may need to be qualified in Wills for future reference.

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Wills can of course be changed and should in any event be checked every so often to ensure they do still properly reflect the parties’ intentions. Again, Edward Hands & Lewis offer an excellent Wills Service ensuring good and proper legal advice is given before drawing up such an important document.

Should any advice be required in respect of any of the matters mentioned a member of our private client and property teams will always be happy to help