Read this before you help your child buy property
6 min read
Lots of parents help their adult children buy their first home. For an overview on how you can help your child buy a house, click here. In this article we delve into the legal implications you need to consider when you look to contribute to your child’s purchase.
There are a few different ways parents help contribute, including:
- Gift them the money
- Loan them the money
- Become a guarantor
- Buy the property together
We look at some of these options and in turn and what implications you may need to consider as a parent.
Gifting them the money
This is probably the easiest and most tax effective option. By gifting your child the funds, they are able to use these as funds towards their deposit and not have to worry about paying any tax on the income. If they hold the funds for at least three months in their account they are also able to use the funds as genuine savings and won’t require a statutory declaration from you that the funds are a gift. You would also need of course to seek financial advice as to any financial implications upon your child/ren and you.
Loan them the money
Another option is to loan your child the money. This means drawing up a formal loan agreement. You can word this any way you like, it might be that they are loaned the money and it is repayable when the house is sold, transferred or ‘on demand’. You can also choose to charge no interest on the loan which means that there may be no income tax issues for you (subject to financial advice).
This can be quite a good option to protect your interests and those of your child against future relationship breakdowns. If the funds are simply gifted and your child separates from their partner at a later date, then the partner could possibly ‘walk away’ with half of the relationship/marital assets. If you have a loan agreement in place which clearly shows that certain assets were not marital assets but loaned individually to one party, then they may be isolated and not considered to be joint assets (subject to financial and family law advice).
It’s important to have the loan agreement drawn up professionally if you decide to go down this path to ensure your interests, and those of your child/children, are protected. No one wants a loophole to be exploited!
Become a guarantor
Rather than gifting or loaning cash, you might choose to offer a property you own as security on the loan for your child. This can mean they can purchase without needing to save a deposit at all or pay any Lenders Mortgage Insurance (further advice must be sought on this front).
In this scenario, you are essentially offering up some of the equity in your property to fund your child’s purchase. It’s important to note this can have implications for you.
For example: If you went to apply for a loan for something else, you would need to disclose this debt as a liability – effectively you have a mortgage on a portion of your property.
Additionally, you don’t have any ownership rights on the property, just the liability. It’s vital to get legal advice before committing to becoming a guarantor to ensure you understand all of the implications on this front.
Buy the property together
Finally, some parents buy the property with their child. This ensures for the financial stake a parent has in the property and obtaining an ownership share in the property. Whilst this may be appealing to you, it could end up being the most expensive option.
First Home Buyers receive grants and stamp duty discounts when they are buying.
However, if you have bought property before and are buying it with your child / children, then they may no longer be eligible for this financial relief, increasing the overall “costs” associated with buying.
There may be other financial and tax implications if the property is a principle residence for your child/children but an investment for you.
Which option is best?
Dependant upon your individual position, there are certainly pros and cons to each of the options which have been very briefly mentioned above. Have a chat with Entourage, our Legal Team has extensive experience providing legal advice to families and can help guide you through the process. Feel free to contact Caroline Symington of Entourage Legal for further information.