It’s perhaps the cruellest irony of this recession: although homes are more affordable and interest rates are at an all-time low, young people find it harder than ever to get a foot on the property ladder because they struggle to scrape together the hefty deposits required to secure a mortgage. It’s hardly surprising, then, that growing numbers of parents are stepping in and buying their children a house-earlier this year, a study by Clydesdale and Yorkshire Banks showed that 84% of first-time buyers are backed by parental support, against 38% in 2005.
Before taking the plunge, however, parents need to be aware of the legal and financial implications of buying a home for their children, or today’s purchase may end up costing them dearly in the future. Parents have four options: they can buy a property in their own name, but let their children use it; they can buy it directly in their children’s name; they can take a charge over the property; or they can set up a trust.
The first course of action gives the asset the greatest legal protection-your children can’t sell off the house to fund a trip around the world, and it won’t be an asset a divorcing spouse can benefit from-but it can prove extremely costly from a tax viewpoint. ‘If the property is held by the parent, any gain from its subsequent disposal would be chargeable to Capital Gains Tax (CGT),’ says Mike Harrison of Saffery Champness. And, of course, adds Valerie Brecher of property-law firm Brecher, ‘you would have to deal with Inheritance Tax [IHT].’
By contrast, explains Mr Harrison, if the parents choose to gift funds to their child, who then makes the purchase, any future gain made when reselling the property is exempt from CGT, provided that the property is the child’s only residence and he or she lives in it. Equally, explains Clive Beer of Savills, by gifting the property, parents are effectively reducing the size of their estate for IHT purposes, provided that they survive for seven years after the exchange.
The downside of this arrangement, however, is that parents have less power to protect the asset, especially if their child marries and divorces. ‘There are two scenarios to consider,’ says Miss Brecher. ‘The first is if the child who has been given a property has a live-in partner, or no partner at all. In this case, should the couple split up or should the child find a partner and then split from them, the partner should not be able to make any claim on the property unless they make a significant financial contribution towards its upkeep (for example, assisting with mortgage repayments), or the house is put in joint names.’
The real worry, she explains, is when a child gets married. ‘If the house is in the child’s name, it automatically goes into the pot if it comes to a divorce.’ One way to bolster the level of protection is for parents to loan, rather than gift, the funds required for the purchase, and then take a charge over the property. ‘This would keep the original value in the hands of the parents,’ says Mr Harrison. However, points out Miss Brecher, it doesn’t take capital appreci-ation into account. ‘Say the property cost £100,000, and now it’s worth £500,000. In the case of divorce, the parents would get back £100,000, but £400,000 would still go into the pot.’
Another possibility is to set up a trust. ‘If you’re a parent settling £500,000-£750,000 on a child, you must be wondering how many 18 year olds are mature enough to deal with that kind of money,’ says Mr Beer. ‘The trust route is beneficial because it gives you all the advantages and none of the disadvantages of gifting a property to your child. However, it needs careful drafting.’
That said, Miss Brecher warns that ‘trusts can be unravelled when it comes to divorce’. She believes that a cleaner solution is to buy the property in the child’s name and have a prospective spouse sign a pre-nuptial agreement that states that any pre-owned asset would not come into the equation on divorce. ‘If handled sensitively, this could be the best way to deal with a purchase from both a legal and a tax viewpoint.’
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