With the combination of higher house prices and costs of living, and increasing levels of student debt, parents, grandparents and other relatives are now donating more and more towards the cost of the fledgling’s first home, with the average donation allegedly being in excess of £20,000.
Whilst most who feel obliged to help in this way will see their savings as the first port of call, what are the tax implications, and are there any other ways for a parent (or other) to help fund a first home?
The simplest method of contributing to your child’s home is to provide capital for them as a deposit. This straightforward, no-strings-attached gift of cash would be a “Potentially Exempt Transfer” for Inheritance Tax (survive seven years and the value falls outside your estate) – and at that point most people would believe that this would be the end of it. Unfortunately, maybe not as, under certain circumstances, were you to move in with your child (say in older age), you could potentially become subject to the “Previously Owned Asset Tax”. This is a charge on an individual who has made a gift but then receives some benefit from that earlier gift – in this case, the money you gifted forming part of the value of the house in which you now reside.
Alternatively, a loan could be made. Any such loan could be either interest-bearing or interest-free as you see fit. Any interest that you do charge should be consistent (ideally this should be put down as a formula in a document for both parties to keep) and you should remember to declare the interest received on your annual tax return. As you have not gifted the funds, the value of the loan outstanding at your death will form part of your estate for IHT purposes. The loan choice does allow capital growth in the property to be in your child’s hands rather than in your estate, whilst still allowing you an element of control if desired.
With both the above options, the beneficiary of the gift or loan should then own their home outright and (subject to all the conditions being met), be entitled to Capital Gains Tax (CGT) Main Residence Relief on a subsequent sale. They should also be entitled to “Rent-a-Room” relief if they take in a lodger.
Another alternative is to purchase a property for your child – with a mortgage if necessary. This choice is often used when a child goes to university, and spare rooms could be let to help defray costs – but the rental income would be taxable and need to be declared on your annual tax return in this case. When you dispose of the property, you would also be subject to CGT on any gain, and the property would form part of your estate for IHT purposes.
A variation on this idea is the use of a Trust to own the property, although there will be many additional implications to consider, and detailed advice would be needed.
Whichever you choose, you should take time to consider the “what-if” scenarios and try to protect against them in any loan agreement or other legal documents. For example, what would happen to money that you gift were your child to marry but then divorce – or, in the case of a loan to your child, should you pass away?
When you help your children fly the nest, care should therefore be taken to ensure that you know all the implications (both good and bad) for all parties and, as usual, professional advice can prove to be invaluable.
For further information on any of the above points or to discuss your tax affairs generally, please do not hesitate to contact Robin Beadle.