Posted on 24.5.16 by Tasoula Addison
The difficulties for first time buyers finding their feet and making their way onto the property ladder is there for all to see. The prices of houses are continually on the rise and wages aren’t. It’s hard. Luckily enough for some, Mum and Dad have stepped into the void to provide their own unique financial services, helping their offspring get together the hardest part of the purchase, the deposit.
For many, the Bank of Mum and Dad is the perfect bank. It is understandable when it comes to changes in circumstances, they offer very low/no interest rates at all and they don’t have to do all the background checks.
The sum of lending which has been bandied about for this year solely from parental contributions is £5bn, making the Bank of Mum and Dad a top 10 mortgage lender. That equates to parents funding around 1 in 4 first time buyers mortgage loans. However, this doesn’t have to be bad news for parents, in fact, with a little thought it could be very good estate planning for later life. There are a few little technicalities that you have to keep a look out for though to make your estate planning efficient and successful.
What is a Potentially Exempt Transfer?
Most gifts you make during your lifetime will be classified as a Potential Exempt Transfer (PET). If you are contributing to a property deposit for your child then it could count as a PET and save your family from inheritance tax in the future. Once you make the gift, you have to survive it by seven years in order for it to not count as part of your estate. However, if you die within this time then the value of the gift will be added to the total of your estate, which may then be subjected to inheritance tax if it is above the threshold.
Protecting Investment & Declaration of Trust
Some parents and grandparents are very keen to help their children make their way in life, not least to get them out of the family home before they celebrate their 40th birthday! However, not everyone is in a position where they are able to just give away thousands of pounds. For some, they are happy to provide a financial contribution so long as this is treated as an investment, which they can get back if they need the cash in the future, or perhaps once their offspring are better off financially and no longer need assistance. When it comes to property, one way of doing this is adding your name to the title register for the house that is being purchased by the offspring.
Parents have to be aware, however, if they already own a property, then adding your name to the title register of another home will mean that you incur the additional 3% of Stamp Duty Land Tax charge, potentially adding thousands of pounds to your conveyancing bill.
Making a Declaration of Trust is a way to protect your interest in the property, without incurring additional tax charges, and it can have a two-fold benefit:
- The sum of money provided will be returned to the donor when the property is sold.
- Money is safeguarded from making its way to the other partner if it was originally used to help a couple onto the market and their relationship subsequently breaks down.
A Declaration of Trust is flexible and a great way to protect your money which also has additional benefits as mentioned above. Helping your children onto the property ladder doesn’t have to be a one way street out of your bank account. It’s more than possible to see this money as an investment, and have the possibility of having it paid back in the future.
You should however bear in mind that, if a declaration of trust is put in place, the monies will not be treated as a gift to your children, and therefore will not be a ‘PET’ for inheritance tax planning purposes. This is because you have not given the monies away – they are effectively just on loan – and they still belong to you, so the value of your estate will not be reduced for inheritance tax purposes.
Gorvins & Estate Planning
To speak to one of our estate planning and inheritance specialists today, call 0161 930 5151 or fill in our online contact form. We will give you the precise legal advice you need to be able to protect your money and order your estate as efficiently and effectively as possible.