I would like to help my daughter on to the property ladder, but I am concerned about the risks involved and the possible loss of family wealth if she enters a future relationship which fails. She has just finished university and is hoping to buy a house with her boyfriend. He’s still studying and can’t get a mortgage, so I would like to give her some financial help. Could you explain the main tax considerations I need to be aware of and some of the options open to me to ensure I take all steps possible to preserve the value of my loan or any other type of financial assistance I decide to give her.
Helping one of your children on to the property ladder might seem like a good idea however it is extremely important to consider all the options and to be fully aware of the future risks, particularly the risk of future relationship breakdowns or divorce, which could force the sale of the property and risk a loss of family wealth.
Often the simplest way to help one of your adult children is to make a simple cash gift. This is likely to allow them to finance the deposit on their property acquisition which can then be supplemented with a commercial bank loan. This arrangement has several key benefits. Under this arrangement the sole ownership of the property will be in your daughter’s name and it will also be recognised for tax purposes as your daughter’s principal private residence (PPR). It will therefore be free from tax when she sells it in the future assuming of course that your daughter will live in the house during the period of ownership and will occupy the property as her main residence.
From your perspective, another advantage is that the gift of cash may reduce your current exposure to 40% Inheritance Tax, as the gift will fall outside your estate once seven years pass from the date of the gift. To determine the precise IHT impact of a gift of cash it is necessary to review your existing estate in more detail.
There is an important disadvantage in gifting cash, however. Your daughter will have outright control and ownership of the property, so she will have the power to sell the house whenever she wants or re-mortgage the property. The greatest risk of all is perhaps the risk that if a future relationship breaks down there is a chance of assets being lost to an estranged partner, your gift of cash may become irrecoverable and this would result in a loss of family wealth.
Very often, to reduce the potential financial risk associated with the breakdown of relationships, rather than giving a gift of cash, parents consider taking joint ownership of properties owned by their children. By paying directly for a part ownership share of a property the part of the property in the parent’s name is likely to be protected as joint ownership usually makes a future forced sale of the property more difficult as the agreement of all joint owners is usually necessary. There are some downsides to this option however. On a future sale, your share of the property would not benefit from capital gains tax PPR relief as the property would not be your principal private residence. You will also have continued IHT exposure on your ownership share, in comparison to a gift of cash which has the potential to fall outside your death estate in future years. The part of the property in your name may attract a 40% IHT tax on your death, depending on the value of your entire estate.
You might also wish to consider a loan, rather than an outright gift of cash. For this option you might consider getting your solicitor to draw up a simple loan agreement for an interest-free loan. If you choose to charge interest on the loan this would be taxable income in your hands and it’s important to be aware that the provision of a loan would be of no benefit in reducing your estate for inheritance tax as the value of the loan outstanding at the date of your death will be an asset of your state.
There are many considerations which fall outside the scope of this article which must not be overlooked. Stamp duty land tax (SDLT) considerations associated with joint ownership should be considered in detail before gifting or lending cash to your daughter for a house purchase. It may also be possible in some circumstances to acquire a property through a family trust, facilitating the ring-fencing and protection of wealth and alleviating some of the concerns associated with outright control of a property by a child. Professional advice should be sought to further explore options available utilising trust law and explore in more detail the merits and potential downside of financing a property by way of cash or loan. The optimum course of action will vary depending on your personal circumstances.
The advice above is specific to the facts surrounding the questions posed. Neither PKF-FPM nor the contributors accept any liability for any direct or indirect loss arising from any reliance placed on replies.
Janette Burns l Associate Director