Bank of mum and dad - a road paved with good intentions

04 May 2016

As has been well reported, the Centre for Economics and Business Research suggests that the 'bank of mum and dad' will account for around £5bn of lending to children buying property, making them a top ten lender. 

With that sort of significant level of funding, it is essential for parents to consider how tax affects the way they fund the children’s property purchase. The outcomes can be very different.

Lending the money
The simplest route is to lend the money, and parents will need to consider whether they take a formal charge on the property or whether there is a separate loan agreement.

For tax purposes, if interest is charged by the parents and paid by the children, then the parents will need to pay tax on the interest income. It will be worthwhile considering which parent makes the loan (the one with the lower tax rate) or whether a joint loan is appropriate.  

If the parents themselves have borrowed the money, perhaps against their own home, they should bear in mind that it is unlikely that they will get any tax relief for the interest they pay - so, if children are simply covering their parents’ interest costs, the parents could still be worse off after tax.
 
Parents could look to draw the money in a more tax efficient way, for example from their business or from a buy-to-let property where, in some cases, tax relief for the interest they pay may be possible.
 
Jointly buying the property
Partial ownership of the property may provide parents with a little more security over their investment, but can come with greater tax costs. For example, if the parents already own their own home, the part purchase will mean that they are buying a second property. This will incur a 3 per cent stamp duty land tax (or land and buildings transaction tax for properties in Scotland) additional charge on the whole value of the property.
 
Equally, they will have capital gains tax payable on disposal, on their portion, if the property has gone up in value. Their child, who occupies the property, should have main residence relief to cover any gain on their portion.
 
Buying the property via a trust
It may be possible to have a more secure arrangement without the tax downsides by acquiring the property in trust. This could avoid the additional 3 per cent stamp duty land tax (or land and buildings transaction tax) charge and provide full main residence relief, but advice around the type of trusts for legal and tax reasons is essential.
 
Importantly, the good intentions associated with helping children get on the property ladder need to be considered carefully. Those parents not taking advice could find themselves with a hellish tax problem!

If you would like to discuss any of the points raised, please contact Gary Heynes or your usual RSM contact.