There is another way to help your children buy an investment property – or in some cases, a home. James Bailey explains a method that avoids the disadvantages of the more usual approaches.
There are many pitfalls for those who wish to help their adult children (or anyone else) to enter the property market. You can make a gift to them of the money needed to purchase their first property, but in most cases this will not be a practical proposition. Even if you can afford to do this, if you die within seven years the gift will be included in your estate for inheritance tax (IHT) purposes.
Possible problems
For those who cannot simply hand over the cash, the usual alternatives all come with problems.
You may consider gifting a property you already own. Again, this comes with a seven year period of risk for IHT, and if the property has a mortgage secured on it, there is potentially a liability to stamp duty land tax (SDLT) to the extent that the mortgage is transferred – always assuming the mortgage lender is prepared to agree to the transfer. In many cases, the mortgage lender may create problems, and will no doubt seize the opportunity to pull in some ‘arrangement fees’ and other charges.
If the property has risen in value since you bought it, so that there is a potential capital gain involved, there are more problems. Because the transfer to the child is a transfer to a ‘connected person’ it will be deemed to take place at market value, and even if the other party is not related to you, it will be a transaction ‘otherwise than by a bargain made at arm’s length’ which has the same effect.
Unless the property concerned is ‘furnished holiday accommodation’ this gain cannot be held over unless it is done by way of a transfer into and out of a trust, which brings its own set of problems and complications.
A better way?
One suggested solution is for the parent to buy the property but to execute a ‘deed of trust’ stating that they hold it as trustee for the child concerned. I have never been comfortable with this, particularly in a case where the mortgage lender is not informed of the arrangement. It is also arguable that the mortgage interest cannot be deducted from the rental income, because the mortgage debt is with you and the rent is being received by the child.
There is a much more elegant solution. The child buys the property, using a loan in their own name, but you stand as a guarantor of the loan and your guarantee is secured against the equity in property you own.
This means there are no ambiguities about the ownership of the property, no risks of being unable to claim a deduction for the mortgage interest, and no SDLT to worry about, except for the SDLT on the actual purchase of the property.
Crucially, there has been no transfer of value for IHT purposes. You have not given anything away, so there is no seven year clock ticking.
The advice in this article applies to children over 18. HMRC may argue that guarantees for younger children mean the rent is taxable on you, though this point is not free from doubt. This could work for the purchase of a home for the child, but only if they have sufficient income to pay the mortgage!
Practical Tip :
Not all lenders will agree to this arrangement, but there are those who will and I have seen it done. Unfortunately, I am not allowed to name specific banks that I know offer this service, but they are out there, I can assure you!
