Helping the next generations onto the property ladder

With increases in interest rates, the financial struggle to step onto the housing ladder is becoming ever harder for younger people. The cost of borrowing is now less affordable and the rise in the cost of living has resulted in lenders reducing the amount of mortgage they will lend. For many, this means delaying their plans or turning to family for financial support.

Over recent years we have seen parents and sometimes grandparents assisting with the house buying process, by either contributing to the deposit, or jointly purchasing the property with their child. Whilst the latter option can make financing the mortgage more affordable, it brings with it three tax issues:

• An increase in Stamp Duty Land Tax costs with the inability to claim First Time Buyers Relief and the 3% surcharge being payable for properties which are not the buyer’s main residence.
• The parents’ share of the property not being subject to Capital Gains Tax exemptions when it is sold due to it not being their main home; and
• The value of the parent’s share (net of mortgage) forming part of their estate for Inheritance Tax (“IHT”) purposes.

Commercially, the parent’s age and the longevity of their retirement income will be a factor in assessing a borrowing request and may impact their credit score recognising the new borrowing commitment.

The shift in the way people are now funding house purchases has seen some lenders start to adapt their products to suit these circumstances. Products exist such as:

• Guarantor mortgages
• Joint Borrower, Sole Proprietor

But what are the tax consequences of these various options?

Mortgage deposit as a gift / loan from parents

If parents have sufficient savings or investments, then they could use this to assist their child in enhancing the level of deposit for the property purchase. It is important to note that a disposal of an investment is likely to have a capital gains tax consequence. The gift would then be treated as a potentially exempt transfer for IHT purposes which falls away upon the parents’ survival for seven years. An increase in the deposit will also reduce the amount required from the mortgage lender thereby making the monthly repayments more affordable.

A loan from a parent may restrict the availability of lenders.

Guarantor mortgage

Here the parents are not the joint owners of the property, but they are required to cover the monthly repayments should the child not be able to. The parents’ home may be offered as security (in addition to the property in question) which puts the parents at financial risk if the child cannot meet the mortgage repayments.

Any outstanding debt which cannot be met by the borrower (e.g. child) would be deductible for IHT purposes on the death of the parent. If the borrower has no financial resources, the entire loan will be deductible for IHT purposes on the parents’ death, but the guarantee may well be treated as a lifetime transfer. This will require detailed investigation into the borrower’s ability to repay the debt from their own financial resources.

Joint Borrower Sole Proprietor

This enables a relative to help the borrower to apply for a mortgage for a larger amount by including their personal income as part of the mortgage application but without being on the title deeds.

As the parents are jointly and severally liable on the mortgage, their share of the loan is likely to be deductible for IHT purposes, and can enable the borrower (i.e. child) to secure a larger loan based on the income multiples of the parents, but without the additional 3% SDLT charge and without the parents having the asset in their own estates for IHT purposes.

Trusts

For greater asset protection, parents or grandparents may want to consider settling assets under a Trust which can then be lent to the child towards their deposit for the property. Specialist tax advice would be needed to see if this type of structure was appropriate for your family.

Whatever the option being considered it is important that the family gets both tax and financial advice to ensure it is the best option for them longer-term.

If you would like further information, please get in touch.