Today brings the news that the “Bank of Mum & Dad” would be a top ten UK mortgage lender if it were a bona fide lending institution. The family bank was involved in a quarter of all UK mortgage transactions this year with the average help amounting to £17,500. As house prices do not show any signs of decreasing soon it would appear that millennials are likely to be dependent on this form of finance for some time to come.
What happens, however, if you give a property deposit to an adult child only to find that they divorce from their spouse with whom they bought their property? Your hard-earned leg up onto the property ladder might then end up benefiting someone who is not a member of your family. Or what if you have an inheritance tax (IHT) problem, anticipate helping your adult children in the future but they are not yet in need of funding?
As far as protecting your funds is concerned, it may be better to consider lending the deposit to your offspring rather than giving it to them. At least then if something untoward happens the funds can be recalled if necessary and they won’t be split on a divorce settlement. If you decide to go down this route you would, however, have to check that this is acceptable to your child’s formal mortgage lender as some are wary of second lenders. If you need to reduce the IHT on your estate this will also not be the route of choice as the money loaned still remains as an asset in the lender’s estate.
One other way of protecting funds advanced if they are likely to significantly exceed the average help of £17,500 is to consider setting up a trust which perhaps buys a share of the property. This way the trust structure provides ongoing protection for the finance. Recent changes to the stamp duty land tax (SDLT) rules mean that if you decide to take up this option a life interest trust will be a cheaper alternative from an SDLT viewpoint than a discretionary trust which will pay a higher rate of SDLT (3% more than usual rates.)
For those wishing to reduce the IHT payable on their assets, a trust can also be a useful vehicle in which to “park” the assets to be used to fund property purchase in advance of a decision to buy. It is necessary to survive seven years from the gift to reduce your IHT bill, and the gift to a trust will start the seven year period running while ensuring that any increase in the funds is outside of your estate. Up to £650,000 currently can be put into trust by a couple without any immediate IHT bill (assuming that there were no other gifts in the preceding seven years).The trust will then provide a layer of protection against events such as divorce or financial difficulties while helping to provide a first home for your children-the bank of Mum & Dad but with additional asset protection.