Helping your children buy a home: Tax and Inheritance Tax considerations for families

Families are increasingly considering how to pass wealth to younger generations while reducing older relatives’ exposure to Inheritance Tax (IHT).

This transfer of wealth is often happening earlier than anticipated and can involve significant sums, giving younger family members opportunities to build wealth earlier.

How that support is structured can have important tax consequences.

University and property

The cost of university continues to rise, with UK tuition fees averaging around £9,790 a year. Accommodation and living costs add significantly to this, particularly in London, where rent can average £10,000–£13,500 a year.

For young people who have received a gift of money, this can raise an interesting question: should the funds be used to pay for university and rent, or could they be invested in a property that provides a home during university and potentially an asset for the future? 

How that property is purchased and financed is important, as involving parents or grandparents in the ownership or mortgage can create additional tax liabilities.

Joint or sole purchase

Parents and grandparents will often contribute towards a deposit or consider jointly purchasing a property. While joint ownership can make mortgage finance more affordable, it can create several tax issues.

These include: 

• Additional Stamp Duty Land Tax (SDLT), including the 5% surcharge where the property is not the buyer’s main residence, and the potential loss of First-Time Buyers’ Relief. 
• The parent or grandparent’s share may not benefit from Capital Gains Tax (CGT) main residence relief when the property is sold if it has not been their main home. 
• The value of their share, less any relevant mortgage debt, may form part of their estate for IHT purposes.

An outright gift to the child may avoid some of these issues, but it also means the parent or grandparent gives up control of the asset.

Guarantor mortgages

A guarantor mortgage allows parents or grandparents to support a child’s mortgage without becoming joint owners of the property. They may, however, be required to meet the mortgage repayments if the child cannot do so, and their own property may be offered as security.

Any outstanding debt may potentially be deductible for IHT purposes on the guarantor’s death, but the guarantee itself can have IHT implications and requires careful consideration of the borrower’s ability to repay the debt.

Joint Borrower Sole Proprietor

A Joint Borrower Sole Proprietor mortgage can provide another option. A parent or grandparent can use their income to help the borrower secure a larger mortgage without being named on the property’s title.

The additional borrowing capacity can help the child purchase a property without the relative becoming an owner. This option can mitigate the additional 5% SDLT surcharge that may otherwise apply where the parent or grandparent has an existing property interest.

The precise IHT treatment of the mortgage liability should be considered as part of the wider planning.

Becoming a student landlord

Renting out surplus rooms to other students can help cover mortgage costs or generate income where the property is owned outright.

The longer-term intentions for the property should be considered carefully. For example, will the child retain it as a rental property after university or eventually move into it as their main home?

The tax treatment of rental income and the implications of the Renters’ Rights Act also need to be considered.

For an owner-occupier, the Rent a Room Scheme can be particularly useful, allowing up to £7,500 a year of rental income to be received tax-free from furnished accommodation in their main home, subject to the relevant conditions.

Could a Trust help?

Some parents or grandparents may want to provide a property for the next generation without giving up control of the asset outright. In these circumstances, a carefully structured Trust may be preferred.

Trustees manage assets for the benefit of beneficiaries, who can include children, grandchildren and future generations. Family members can potentially be appointed as Trustees, helping to retain an element of control over how the property is managed. 

A Trust can therefore provide a way of preserving property within the family over the longer term, rather than transferring it outright to a single beneficiary.

Like with a direct gift this option can also have potential IHT planning benefits. However, the settlors need to be careful with the value they transfer as this can trigger a lifetime IHT charge.

Trust planning does come with its own tax and administrative costs. Relevant Property Trusts can be subject to IHT charges every 10 years, potentially at up to 6% on the value above the available nil-rate band, as well as charges when capital is distributed. CGT can also arise when the property is sold, with main residence relief generally unavailable to the Trust. SDLT surcharges may also apply when a Trust acquires a property, although planning opportunities can exist.

Getting the structure right

Helping the next generation with university and property can be a valuable part of family wealth planning.

There is no one-size-fits-all solution. Whether a property should be owned by the child, jointly with a parent or grandparent, financed through a specialist mortgage arrangement or held through a Trust will depend on the family’s objectives and circumstances.

Taking advice at the outset can help families balance the competing priorities of supporting the next generation, retaining control and protecting family wealth for the future. 

Thinking about helping your children or grandchildren buy a property? Our tax and wealth planning specialists can help you understand the SDLT, CGT and IHT implications and identify the most appropriate structure for your family. Get in touch with our team to discuss your options.