In the current difficult economic times and with the unwillingness of most banks and buildings societies to loan much more than 75% of a property’s value, many parents are lending or giving money to their children to use as a deposit so that they can buy a decent home while prices are relatively low.
These arrangements can be fraught with difficulties as advice is rarely taken and consequences are not thought through.
Basically there are three ways to help children – through an outright gift, as an interest free loan or as an investment. There can be significant tax implications. In the case of an outright gift, if the parent dies within 7 years of handing over the money, the child may have to pay Inheritance Tax on the value of that gift. Similarly, a parent may have to pay Capital Gains Tax if the money is lent with interest and the value of the property increases.
If the money is being lent then this should be recorded in a formal document to prevent later confusion should circumstances change. For example, problems could arise if the parent died and the surviving spouse needed the money back to live or to pass to other children to meet the terms of the dead parent’s Will, or if the marriage or relationship of the child broke up.
The document does not have to be complicated but a clear and simple statement of the facts signed by all parties. It needs to contain details about the basis on which the loan has been made, what will happen to the money if one of the parties dies, or the child or spouse or partner split up, or if the parent needs the money back.
There can also be implications if a couple are entering a relationship with disproportionate amounts of money. There are often disagreements as to what proportion of a property is owned by each partner. These cases can be sorted out in Court but the result would depend on the facts or the credibility of a witness. It is much cheaper and less traumatic to sort it out at the outset with a legally valid document rather than waiting and ending up in Court.
Beviss & Beckingsale have property and tax experts who can help you with these, and other, issues and so if you would like to speak to us then please contact your local office.