Recent data highlights a growing trend where the “Bank of Mum and Dad” plays a pivotal role in home purchases.
- In 2023, family-assisted home purchases surpassed £9 billion, doubling since 2019.
- First-time buyers increasingly rely on familial financial support in response to rising rental costs.
- The complexity of financial assistance includes options like gifting, loans, or investments.
- Legal experts advise families to consider tax implications and formal agreements when providing financial aid.
Recent research underscores a significant shift in the housing market, where financial assistance from family members, particularly parents, has become increasingly pivotal. The so-called “Bank of Mum and Dad” has become a key player in this realm, financing over £9 billion in property purchases in 2023 alone—a figure that has doubled since 2019. This surge is not only a testament to family support but also a reflection of the escalating rental costs that compel many first-time buyers to seek homeownership earlier than anticipated.
A growing number of first-time buyers, estimated at 164,000, have turned to their families for financial assistance this year. This is driven by the necessity to secure favourable mortgage deals that require lower loan-to-value ratios. Parents, in response, are often faced with a dilemma: whether to gift, loan, or invest money into their children’s property acquisitions. Such decisions are further complicated by the evolving landscape of capital gains tax and inheritance tax, as noted by Claire Johnson, a private capital lawyer.
Johnson warns of the complexities involved in making these financial decisions. The implications vary significantly based on whether financial support is structured as a gift, loan, or investment. Mortgage lenders historically prefer contributions to be classified as outright gifts, as this simplifies the ownership structure and ensures no third-party interests in the property. However, gifting also initiates a seven-year period wherein the gift’s value can potentially be removed from the parents’ estates for inheritance tax purposes.
While gifting may offer parents the satisfaction of directly supporting their children’s futures, it also carries risks. The gifted amount is susceptible to the child’s future decisions or claims from third parties, especially in cases of relationship breakdowns. To mitigate such risks, parents are encouraged to consider cohabitation or prenuptial agreements to protect these family contributions.
In contrast, if parents decide on a loan approach, establishing a formal loan agreement is crucial. This not only safeguards the contributed amount from third-party claims but also allows it to be secured against the property as a second charge. Although loans keep the contribution within the estate for inheritance tax considerations, many parents contemplate forgiving these loans when their children become financially stable, with any waiver requiring documentation through a deed.
Alternatively, some parents might prefer to invest alongside their children, retaining partial control and potential financial returns. However, this option includes tax considerations such as a stamp duty surcharge and capital gains tax liabilities. Trust planning offers another route, enabling parents to set up discretionary trusts for their children’s benefit. Although parents cannot directly benefit from these trusts, they can act as trustees, determining fund allocation and starting the seven-year inheritance tax period upon contribution.
Specialised legal advice is imperative for families navigating these complex decisions to ensure all actions are well-documented and tax-efficient.
Careful consideration and expert guidance are essential for families engaging in financial support for property purchases.
