“Owning a home is an aspiration for millions of people in our country. This government is committed to helping people achieve that aspiration …”
These are the first words in the Government’s December 2015 consultation paper on the 3% SDLT surcharge. Sadly it is clear that the Government intends to penalise many first time buyers when their parents (or other relatives) help them “achieve that aspiration”.
There are three ways in which a parent can help their child buy their first home:
a cash gift or a loan,
by using the parent’s creditworthiness to bolster the child’s ability to borrow from a bank or building society, and
by the parent buying a share in the child’s first home.
The new SDLT 3% surcharge penalises those choose or are forced to adopt method 3, which is unfortunate, because, in this sort of scenario, most lenders prefer the parent to have a share in the child’s new home.
For example, let us suppose Alex is buying a flat for £175,000 and that that Mother and Father agree to give Alex £17,500 to pay the deposit. Alex has sufficient savings to cover the expenses of purchasing, but needs to borrow the balance of the purchase price, £157,500. Alex’s financial position is not good enough to persuade the lender to lend to Alex alone, but it will lend if Mother and Father are joint borrowers and become joint owners of the flat with Alex.
If Alex alone buys the flat the SDLT liability will be £1,000. But if Mother and Father, who already own their own home, are joint purchasers with Alex, the SDLT liability soars to £6,250 because the surcharge rates apply.
If the lender can be persuaded to lend on a different basis and Mother and Father are not joint owners the surcharge is not payable. Mother and Father could execute a guarantee of Alex’s obligations. This would allow the lender to sue Mother and Father if Alex fails to make mortgage payments on time or defaults in some other way. Alternatively the lender could lend the advance to Alex and Mother and Father, so that all three are the borrowers. Alex, as the sole owner of the flat, would then mortgage it to the lender as security for the indebtedness of all three of them. Such a mortgage is known as a “third party mortgage” because, as well as securing Alex’s indebtedness, it also secures the indebtedness of Mother and Father who are third parties. They own no part of the flat so they cannot be parties to a mortgage of it. Third party mortgages are common in commercial transactions and all the major banks have standard form third party mortgage documentation. But they are not routinely used in residential loans.
The problem lies in persuading residential lenders that they will be no worse off if they accept a guarantee or a third party mortgage. Some lenders won’t do either of these because their operating systems won’t accommodate them. Some argue that their legal position will, technically, be different and therefore less secure. Others argue that young borrowers are less reliable and that the involvement of the parents as owners/borrowers means that the child is more likely to honour all the borrower’s obligations under the loan agreement and the mortgage document.
Some parents become part-owners of their child’s new home just to satisfy the lender’s requirements and have no intention of treating their share of it as an investment. Others may take a share to protect the child against the consequences of youthful folly. Others treat their share of the child’s purchase as a genuine investment on which they expect to see a real return. My colleagues Carol Cummins and Sue McDonald can advise on the capital gains and inheritance tax implications whichever route is adopted.
Many of those responding to the December consultation paper opposed the Government’s proposal to penalise young buyers in this way. It may be that when the surcharge rates are finally enacted (they come into force on 1 April 2016) the final version will be less hostile to parental assistance. However the draft legislation introducing the Scottish version of the surcharge, published by the Scottish Parliament on 28th January, makes no concessions whatsoever in this context. It is quite probable that the English, Welsh and Northern Irish version will read very similarly.