THE BANK OF MUM AND DAD
Lesley Price FCILEx of CGM Solicitors provides advice of the plus and pitfalls of including your children in your funding arrangements and the things to consider if you are using some of your savings or the equity from your property to help your children fund a new home
We have all heard the term ‘bank of mum and dad’ recently and co-funding first time buyers purchasers through using their parents’ savings or equity has become so commonplace that the bank of mum and dad is now unofficially the tenth biggest lender in the UK according to a 2019 report published by Legal & General.
But there are lots of forms that this type of funding arrangement can take and there are questions you need to make sure you ask yourself to make sure it’s the best solution for you as well as those you are gifting your hard-earned money to.
Is it a loan or a gift?
We often talk about gifted deposits but you need to think long and hard about whether the investment you are making in your children’s purchase realise is as ‘no strings’ as it seems. If there are to be any clauses or caveats requiring the money to be paid back in certain circumstances then the money is not a pure gift and it is worth having a solicitor draft a loan agreement or second charge document to ensure those conditions are complied with.
If you ‘gift’ money without any formal agreement then it may be difficult or impossible to recover this money if the terms are broken or in the circumstances where one of the buyers goes bankrupt for example. Lenders prefer unrestricted gifts when approving a buyers mortgage but it doesn’t mean they will always object to a loan agreement as long as the terms are clear. It is important that the information given to your children’s lender or mortgage broker is a true reflection of the circumstances to avoid potentially invalidating their mortgage.
Who are you actually gifting money too?
If your child is buying a home with their spouse or partner you really need to ask yourself an honest question over whether the money you are gifting is being gifted to both of them jointly or whether the gift is really intended to benefit your own child in the longer term. This is because if you don’t take steps to set this out at the outset then the law will ignore the gift and if they fall out any equity in the property could end up being split 50/50. Even if with the help of your gift your child may technically be due a bigger share.
Making sure they invest the extra in having a Declaration of Trust drawn up to set out who has contributed what to the purchase and purchase costs can allow your gift money to be ringfenced to form part of the equity to your particular child if things go wrong. These are usually relatively inexpensive when you take into account the gift amount and can provide a great level of reassurance that if something does go wrong that you child can continue to benefit for the gift in the future.
If you are using your home equity is that the best way to fund this?
There are a number of schemes that can allow you to release equity from your existing home to help your children fund a purchase. And they are sufficiently complex that I won’t go into too much detail here. Some schemes are better than others and which one is right for your needs to be based on a full review of all your financial circumstances.
A specialist financial adviser may be able to think of other ways in which you can assist with their purchase without using the equity in your home.
If you do go ahead with this type of scheme make sure you take detailed legal financial advice from representatives who are experienced with these schemes so you know whether the particular scheme is right for your circumstances and you know all the con’s as well as the pros. Always ensure you use a company that’s a member of the Equity Release Council. This trade body’s members must promise a ‘no negative equity’ guarantee, so your estate will never owe more than your home is worth.
Do your children have sufficient insurance and up to date wills to protect your and their investment in the longer term
It is tempting when buying a property to put off the issues of life insurance and will planning to save costs upfront. Especially if you are a first time buyer on a tight budget but it really is important to invest the extra to make sure adequate life insurance policies are in place to pay off any existing debts on the property and that your children have up to date wills in place to confirm what should happen if something happens to one of them. This is important to ensure their future security and to provide an extra level of security for your children. Particularly if there are grandchildren to provide for or your child is buying with someone else. It really is worth encouraging them that they need to have a full plan in place.
Are there unintended consequences for your estate in the future?
You are able to gift money to your children tax-free during your lifetime but what some people may not realise that if you don’t survive for more than 7 years after the gift then the gift amount could still count as yours when the inheritance tax on your estate is calculated. When the gift is first made it is called a Potentially Exempt Transfer so there is no tax to pay but the keyword is ‘potentially’ If you die within seven years, it’s called a Chargeable Transfer and if your estate is on or around the threshold for inheritance tax then you would be best to seek advice to ensure the gift does not have potential tax implications for your estate later.
The current inheritance tax threshold is £325,000 per person. It doubles to £650,000 for a married couple assuming the first person to die leaves their entire estate to their partner. Anything over this limit is subject to a 40% tax bill.
If you live together but are unmarried then the doubling in the estate value does not apply and again you may need to take advice on what value there is in each of your estates and who might be the best one to give the gift in these circumstances.
Are you leaving yourself sufficient to live on?
If you are looking at gifting a substantial sum it is worth taking advice from a specialist financial advisor. Not only do you want to male sure the gift does not have any unintended tax consequences for your estate or the person you are gifting money too but you also want to make sure you are leaving enough in your own savings to maintain your standard of living and enjoy those things you want to do. You have worked hard to build up your savings and pensions pot and whilst looking after your family is important you need to be sure that you have enough left over to enjoy the later years you have worked so hard for. This is a great time to review your finances in full and check that all your savings, pensions and investments are working as hard as they can do to ensure you the best quality of later life.
Will the payment leave you enough if one or both of you need to pay for residential care?
Care Home fees in the UK are means-tested and If you live in England, the current rules are: If the total amount you have saved is more than £23,250, your will be expected to pay all fees. If the total is between £14,250 and £23,250 then you will still need to make some contribution. When giving money away as a gift to help your children buy a property whether the money comes from savings or equity release from your existing home then you need to make sure that you are not putting yourself in a position where you have enough savings to have to pay all or part of your care home fees if needed but not enough to afford the type and location of the home you want to be in. While none of us wants to think about losing our independence it would be sensible to take financial advice and get some idea of the potential care home fees so you are sure you have enough left in your own pot to make the decisions you want to for yourself if that time comes.
Take all the right advice
Get advice and think wider than just the property aspects. This type of gift can be a great boost to get your children onto the property ladder but it can come with all sorts of unintended consequences if it is not thought through. While the gift will involve a Conveyancing Solicitor for your children you also need to make sure you get wider advice for yourself, not only on the gift but to make sure this doesn’t affect your standard of living in your retirement or have consequences for your estate later on. Money spent now getting everything set up properly means less worry for you and your family in the future.
At CGM Solicitors we can provide a comprehensive advice service on all these aspects as well as our conveyancing services. For more information as to the services we can offer email email@example.com or call us on 023 8063 2733 and quote the reference ‘Heyday’