Bank of Mum and Dad

Next time your children groan at your dad jokes, your taste in clothes or the all-round general embarrassment you bring to their lives, remind them that it really can pay to keep the old folks on side. Particularly when it comes to the housing market, with the Bank of Mum & Dad (BoMD) now being involved in almost a quarter of all property transactions in the UK.

New figures show that the BoMD (which admittedly can extend to financial gifts from grandparents, aunts & uncles and, occasionally, friends) will fund approximately 23 per cent of property purchases in 2020.  This is an increase from the BoMD assisting with 19 per cent of property purchases in 2019.

With viewing and valuations impossible to carry out during lockdown, the property market effectively came to a complete standstill at the end of March. However, the easing of restrictions over the summer months resulted in increased activity supported by Chancellor Rishi Sunak’s introduction of the Stamp Duty holiday for purchases of up to £500,000.  Such an announcement has seen an increase in demand as individuals could save themselves anything up to £15,000 if they complete on their purchase before the scheme ends next March.

However, demand is one thing, finding lenders to meet that demand is another. With the economy struggling, the banks and building societies have wasted little time in tightening their criteria, with first-time buyers and the self-employed hardest hit. The challenges for youngsters are many: wages are stagnating, unemployment is rising, property prices remain high, interest rates are starting to climb, and the banks are not overly keen on lending anyway. What chance do these individuals have?

This is where the BoMD can and often does step in. In many cases the family home contains plenty of equity and parents might also have a pot of savings available. The question really becomes in the circumstances where BoMD do choose to assist their children, should the money come by way of a loan or should they give it as a gift? Does it really matter?

Well the answer to that is a definite yes. It matters for several reasons and the parties’ intentions need to be determined at the outset.

If the BoMD opt to provide the money by way of a loan, then the parents will clearly expect the money to be repaid at some point in the future. The terms of the loan should be clearly set out in writing to avoid any confusion or conflict at a later date. The loan agreement will deal with considerations such as repayments, interest, and various other factors and clearly set out the parties’ intentions moving forwards. The provisions should be discussed with a solicitor to ensure the agreement reflects exactly what the parties intend.

Parents should also consider taking security over the new property to ensure their interests are protected, the most common form of security in these circumstances would be a charge on the property but other options can be considered.

The terms of the agreement and the protection of the parent’s interests are factors that should be discussed at the outset with a solicitor because, as much as families love one another, emotions can soon change when money is involved and it is beneficial for all parties if the position is clearly identifiable before money exchanges hands.

If the money is a gift, then things are very different. The chances are the mortgage lender will ask the parents to sign a form to confirm that the money has been gifted, that they do not want it back and that they will have no financial interest in the property being purchased. This is nice and simple but there is another consideration – inheritance tax.

Outright financial gifts are known as ‘potentially exempt transfers’. No inheritance tax is due at the time of the gift. They are known as ‘potentially’ exempt because if the donor survives for seven years after making the gift, it is not included in the donor’s estate for inheritance tax purposes.

However, if they die within that period and the value of his or her estate (which will include all gifts made over the preceding seven years) exceeds the ‘nil-rate band’, then inheritance tax becomes due.

If the death occurs in the first three years following the awarding of the financial gift, the full amount of tax is due.  Thereafter it tapers down by 20% each year so that in year 7, only 20% of the inheritance tax would be due and after that the gift is not subject to inheritance tax.

Whilst the BoMD has grown to effectively become the UK’s 11th biggest lender for mortgages in the UK, there can also be situations when the roles are reversed. There are times when children are called upon to help their parents, especially when it comes to care home fees. In such circumstances, it remains important to ensure the agreed terms are set out in writing and the children ensure they secure their interests in the same manner as explained above in relation to the BoMD.

A common way of protecting your assets from being swallowed up by costly care home fees is to place them into a Will trust. The trust fund will be held for the surviving spouse’s benefit for the remainder of their life, whilst being ringfenced to ensure they only go to your chosen beneficiaries following the second death.

However, any attempts to offload assets in a hurry to avoid care home fees can fall foul of the ‘deliberate deprivation of assets’ rule. A local authority, in its assessment of an individual’s finances for providing care costs, may include the value of any gifts previously made. The local authority must show that the individual had a reasonable expectation that he or she might would need care at the time of the gift and the avoidance of care charges must be a significant motivation. It may include money to help children get onto the property ladder, putting money into trust, paying off someone else’s debt or simply transferring a property into someone else’s name.

‘Deliberate deprivation’ still requires evidence from the local authority; it does not automatically apply as there could be valid reasons for an individual’s actions. It is therefore important to ensure individuals obtain the relevant legal advice before taking any action.

-Lily Burton, Corporate Commercial

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