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Mortgage, Loan or Gift?

“Continued affordable mortgages have provided first-time buyers with an ideal opportunity to take their first step onto the ladder in February. Lending to aspiring homeowners continues to rise, while the base rate remains so low. For those with enough savings for a deposit, now is a great time to buy. Many are taking advantage of the opportunities on offer” claims John Bagshaw, the corporate services director of Connells Survey & Valuation.

What about those who do not have enough for a deposit? How do they manage to get on the property ladder? More and more first time buyers rely on the ‘Bank of Mum and Dad’ as well as high street lenders, but what are the pitfalls of the ‘Bank of Mum and Dad’ specifically for mum and dad?

Well, there are many tax and legal implications; the first of which is income tax. If parents take a legal charge over their children’s property there may be tax implications on any interest that is charged. So, how about having a legal or beneficial interest in the property? As this is not the parents’ primary home there are capital gains tax implications when the property is sold. What about inheritance? Should either a legal charge or financial interest in the property be the chosen route, there is the risk of an inheritance tax liability as the loan or value of the legal or beneficial interest will fall back into the deceased’s estate.

So how about gifting money to children for the purpose of a property purchase? Well, let’s say that mum and dad gift £50,000 to Charlotte, who lives with Adrian. Charlotte and Adrian then separate; the house is sold. The sale proceeds are split equally between Charlotte and Adrian because Charlotte’s mum and dad made a gift. Adrian argues that the gift was to them both and Charlotte says it was to her; but there is no legal document that sets out the intention of the gift. In this scenario, parents must be very clear and should always enter into the correct legal documentation when gifting monies to their children.

What about mum and dad gifting money to their son, Max? Max starts his own business but after a couple of years’ in he goes bankrupt. Without the correct documentation in place, mum and dad’s money could be swallowed up by the Trustee in Bankruptcy and again their funds remain potentially unprotected.

It is important to consider carefully the risks of loaning or gifting money for a property purchase and to make an informed decision with the correct legal advice. If you are thinking of making such a loan or gift, then please do contact us to explore your options and how best to protect yourselves and your children as the future is impossible to predict.

Disclaimer: This article is not intended to constitute legal advice.  For legal advice in connection with the above, please contact us directly.

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