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Helping First Time Buyers onto the Property Ladder
14 08 2008
In the current housing market, many first time buyers are finding it difficult to get a foot on the property ladder. Increasingly, mortgage lenders are requiring prospective purchasers to put up larger deposits, whilst offering smaller advances. 100% and 95% mortgages appear to be a thing of the past.
Parents, who themselves are very likely to have benefited from rising property prices over recent years, can often give invaluable assistance to young people trying to get onto that first rung of the property ladder.
Below are three of the more obvious ways in which parents can help.
1. Gift
If parents are considering making a gift, they should bear in mind that cash gifts can attract Inheritance Tax. However, parents are entitled to gift £3,000 each per year, without it having any effect on their Inheritance Tax position. If they have not made any gifts in the previous year, they will also be able to use the previous year’s allowance, which means each parent could potentially gift £6,000 without affecting their Inheritance Tax position. It is of course possible to gift more than this amount, but parents should be aware of the potential Inheritance Tax implications of doing so.
If their son or daughter wants to buy a property jointly with their partner, parents may be keen to ensure that their son or daughter will retain the benefit of the gift even if this relationship subsequently breaks down. In these circumstances, it is possible to arrange a declaration of trust, detailing the sums each party has contributed and setting out how the proceeds of sale will be split in the future.
2. Investment
It is fairly common for parents to invest money in their son or daughter’s property. The parents will usually own a share in the property and when it is sold they will realise their investment and take a share of the sale proceeds.
Parents should of course be satisfied that they will not need access to the money invested whilst it is tied up in the property. This type of investment may also be considered risky in a falling market and parents would do well to take specialist financial advice.
3. Loan
Parents may decide to lend money to their son or daughter by way of a formalised loan agreement incorporating any agreed terms. The loan can then be secured against the property, effectively as a second mortgage. The parents’ interest will of course rank behind any mortgage with a bank or building society.
Any parents considering any of the above arrangements should ensure that their Wills (and the Will of their son or daughter) are up to date, particularly if they wish to ensure that any of their other children are similarly provided for.
For further details or if you would like to discuss any of the issues raised, please contact Lawrence Gibbons by e-mail at lgibbons@odt.uk.com, or by telephone on 01273 221586.