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Helping your children get on to the property ladder – gift or a loan?

Published: 15 November 2021

In the Times newspaper recently, it was reported that parents will give or lend almost £10 billion this year to help their children get on the property ladder.  With the recent boom in house prices, it has become increasingly difficult for the younger generation to buy their first home.  The article reports that this year the average sum contributed by parents was £58,000.

This article aims to highlight the potential legal and tax implications of parents making these generous gifts or loans.  The conveyancing process involved with buying a house can be fast-paced, and parents can fall into the trap of quickly providing the money to help their child complete their purchase without taking the time to obtain proper legal advice about the ramifications for them and for their child.

As lawyers, we have also seen many instances where it has not been clearly agreed and documented between the parents and the child (and in some cases, the child's partner) whether the parents' contribution is to be treated as a loan or a gift – the legal and tax implications are different and so the distinction is extremely important.  When family relations break-down or the child and their partner split-up, difficulties can then arise about how the proceeds of sale should be divided and whether the parents are entitled to anything back.

If the parents intend to lend the money to help their child purchase the property, then they should take legal advice about how that loan and the terms of its repayment should be properly documented.  In some cases, the parents may be advised to seek security for their loan by taking a second charge against the child's new property.

The parents' Wills should also be reviewed because it may be necessary to provide for what should happen to the loan if they have both died – most parents will say that they want the loan to be written-off, but that their child takes the loaned sum as part of their inheritance.  This is particularly important where the parents have other children and wish to ensure equality and fairness between all of their children.

The same considerations can apply where the parents have made a gift to the child, rather than a loan.  The parents' Wills should be clear about how this gift to one child should be treated where they have other children inheriting from their estate – should the child who has received the gift receive less from their parents' estate because the gift is to be treated as an advance on their inheritance?  It is always advisable to be clear about what is intended and include specific wording in the Wills of the parents.

Making a gift to a child can also have Inheritance Tax implications, both for the parents and potentially for the child if the gift is sizeable, and consideration needs to be given to how this might impact the taxation of the parents' estate if they die within seven years.

With the property agent Savills reporting that house prices will continue to rise in 2022 and beyond, the 'Bank of Mum and Dad' is expected to continue to be heavily relied upon to provide financial support for years to come.

For further advice, please contact Sarah Nash on 01332 600005 or email Sarah.Nash@AandCo.co.uk.

The information contained within this article is provided for information purposes only and does not constitute legal advice.  Specialist legal advice should be taken in relation to specific circumstances.