Snakes & Ladders: Helping children get on the property ladder
PUBLISHED: 14:06 25 February 2011 | UPDATED: 18:57 20 February 2013
Many parents want to help their children get onto the property ladder, so what's the best course of action?
Many parents still have their own financial commitments, which makes it difficult or impossible to give financial help, especially if there is more than one child.
However, there are some parents and even grandparents who may have paid off their own mortgage, or who have come into money and are looking to put it where it can be of most benefit, especially when banks are not paying high interest rates to savers.
Financial help to children is often in the form of a deposit, representing 10- 20 per cent of the purchase price, or for the full price of the property.
Before making any commitments to pay over any money, parents should be warned to be careful how they provide the financial support to their children as it could result in difficulties later on.
There may be partners or spouses to consider, for example if they separate. Parents are mainly hoping to help their own children, with their partner or spouse as someone who will additionally benefit. But without the correct paperwork in place that partner or spouse could benefit a little more than anticipated in the event of a break up or separation.
How parents can help:
by an outright gift
an interest free loan or
as an investment
The first and last methods could both have tax implications which need to be explained. In the case of an outright gift, if a parents should die within seven years of handing over the money to their child, inheritance tax could be payable.
Similarly, if the money is given as an interest-free loan, the parent may have to pay Capital Gains Tax if the money is lent with interest, or for investment purposes if the value of the property increases.
If the money is a loan, with or without interest, it is vital that a formal legal document is entered into by all parties at the time of the transaction, rather than as an after thought later on.
This will avoid any confusion should any situation change at a later stage, for example if one of the parents should die, leaving the surviving parent needing the money back to live on or pass to other children if that was a term of the deceaseds will, or perhaps if the relationship of the childs broke down.
A Deed of Trust drawn up by a solicitor and signed by all parties will greatly assist in settling any problems before they arise.
The Deed need not be too complicated, but would need to set out clearly the basis on which the loan has been made, what should happen if either of the parents should die and what should happen should the child and the partner separate.
Family circumstances can often change unexpectedly. It is far cheaper in the long run to have a legally valid document drawn up at the beginning of the transaction than to end up with the court unravelling the terms of a verbal agreement later on.
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