Helping fund children’s first home is not as safe as houses
Parents helping their children onto the property ladder face losing thousands of pounds if their offspring splits up with their partner and the couple’s home is sold.Data from Legal & General reveals that the ‘Bank of Mum and Dad’ will fund one in four of all UK mortgage transactions in 2016, with an average contribution of £17,500.
However, the Bank of Mum and Dad faces substantial problems on two fronts, warns Graham Ireland, private client partner and head of conveyancing at Blackburn-based WHN Solicitors.Graham explained: “If the property is owned in joint names as joint tenants and the partner whose parents lent the funds dies, the house and money go automatically to the other partner.
“The other major issue in owning a property this way is that if the couple split up and sell the house, the other partner could inherit half of the Bank of Mum and Dad funds.”One way to stop this happening is for the property to be owned as tenants in common, a separate declaration of trust to be prepared setting out their respective interests in the property and for a restriction to be registered against the property.
However, the problem with a declaration of trust is that the Inland Revenue may assume the parents have an interest in the property. This may mean that the transaction falls foul of the new stamp duty rules and extra charges could be levied.Graham continued: “Assuming the parents already own their own property, their son or daughter would have to pay the higher second property stamp duty rate – which is a three per cent supplement on the entire value of the property.
“There are ways round this, for example the parents could register a second charge against the property. However, the first lender – the bank – would have to give their consent to this and they may not be prepared to do so. As a result, parents frequently ending up signing over the money as a straightforward gift.” Graham added: “Nevertheless, each lender is different and some operate flexibly on a case by case basis. By and large, the smaller the parental loan in relation to the purchase price and mortgage advance, the more amenable the bank will be to registration of a second legal charge. Clearly, it pays to carry out extensive research and shop around in order to get the best possible deal before making any commitment.”