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The last 20 years has seen a perfect financial storm brewing for the next generation. The cost of further education, entertainment, transport and, in particular, accommodation and property has increased to a whole new level, creating ‘Generation Rent’ who are finding that their finances are squeezed and they are turning to their parents in ever increasing numbers.

With the need to provide constantly increasing deposits, the Bank of Mum and Dad is busier than ever, and now the UK’s sixth largest lender. Helping family onto the property ladder can be a legal minefield and protecting family assets in the face of unexpected life events is incredibly important. But what are the legal ramifications of your help?

We’ve lost count of the number of times someone has contacted us to discuss their property and used the word “straightforward” to describe it. In reality, it is rarely the case that property matters are without complications but it can be easy to miss the subtle details which transform a “straightforward” transaction into something a little more challenging. 

With the younger generations still struggling to keep up with the pace of increasing property prices, it is increasingly common practice for buyers to receive financial assistance from loved ones to help them with their move. The question will then arise as to how the benefactor’s interest is protected if the assistance being provided is not to be treated as a gift or, in the case of assistance being given to a couple, to be treated as a gift only to one of them. 

A simple idea can become increasingly complicated and clients can quickly become entangled in a web of unforeseen consequences. In the same way, missing an important detail can cause loss, stress and upheaval in future which could easily have been avoided with a bit more knowledge of the legal implications. 

To help you navigate your way through the legalities, we’ve outlined what you may want to consider when helping your child financially 

A Gift

This is the most common way that parents tend to help their children towards a deposit or other costs, and by far the simplest in terms of legalities.

Gifts can be made formally or informally but, given the size of the sums likely
to be involved and the fact that such arrangements could be scrutinised by HMRC or other third parties in the future, it is always best to document gifts and to keep such paperwork in a safe place or with your solicitor. 

Possibly one of the greatest concerns for those gifting capital is who might end up with money in the future and there are a number of mechanisms including preparing a Living Together Agreement or a prenuptial agreement and having a valid up to date Will that could be used to help ensure it stays in the hands of the intended beneficiary. 

A Loan

If you plan to give a loan, you’ll need to make sure that everyone is on the same page when it comes to paying back the money and consider how the funds will be protected. 

Loan agreement
Even within a family, or possibly especially within a family, it is wise to ensure that the terms of a loan are clear. From the outset it’s important that all parties understand that the loan is not a gift, even if it might become one at a later date. The terms of the loan can be set out in a Loan Agreement. This would cover aspects including the length of time before the loan is meant to be repaid, a specified repayment date, the amount of any repayments, what would happen in the event of a default and any other terms agreed between the parties. 

Declaration of Trust

Where your contribution will be used to fund a joint purchase, are both purchasers contributing equally to the cost of the purchase and the running costs of the property? If not, you should consider a Declaration of Trust – a legally binding document which records the financial arrangements between joint owners of a property and anyone else who may have a financial interest in the property. This will help to protect any unequal shares, document who will be responsible for the monthly expenses and to record how much each party would receive should the property be sold in the event of the relationship failing. 

Charge against property

 Registering a charge against the property turns an unsecured loan into a secured loan and will mean that, in the worst case scenario, a sale of the property can be forced in order to repay the debt. Often such an agreement will require the property owner’s mortgage lender’s consent. 

Joint Ownership

Another way to help your child onto the property ladder is through joint ownership. If going down this route you may want to consider the tax implications of Stamp Duty and Capital Gains. 

• Stamp Duty Land Tax (SDLT) 

Registering as a co-owner of a property can be a good solution but there can be serious tax implications, which are now exacerbated by the higher rate of SDLT that applies to those who are named owners of more than one property. Avoiding this can be tricky, as even if you rearrange the ownership of your existing assets, as SDLT will take into account property registered in the name of any spouse or civil partner, as well as that registered in your name. 

Even setting up a trust arrangement, whereby the property is held by the named owners, but an interest is reserved in favour of the benefactor, is not a clear cut solution and HMRC will look beyond the legal ownership when making its assessment. Some suggest registering a charge against a property in the same way that any mortgage loan would be secured, but if the property is already subject to a mortgage this would require that lender’s consent and there is also the question of how to record the agreed terms; when will repayment be made? Will it be by instalment or single lump sum? Will interest be charged? What happens if something goes wrong?

• Capital Gains Tax (CGT)

If you’re directly involved in purchasing a property with your child and you already have your own home, it will be construed as an investment on your part. As such it will be subject to tax when it is sold. The rate of CGT for residential property is currently 18% if your overall annual income is below £50,000 and 28% if your overall annual income is above the £50,000 threshold.

The annual allowance for capital gains is £12,000 for an individual or £6,000 for a trust during the 2019/20 tax year. Married couples can combine their allowances for jointly owned assets.

As a part owner of a second property you’ll pay the proportion of the growth in value between buying and selling, attributable to your share of the property. However estate agent fees, legal fees and SDLT are considered allowable costs that can be deducted from the exposure to CGT.

Partners, Friends and Tenants

Are you helping your child to purchase a home together with a friend or partner, or will they rent a room to a tenant? What else do you need to consider?

• Living Together Agreement

If you’re helping a child who’s unmarried but buying with a partner, they should consider a cohabitation agreement otherwise known as a Living Together Agreement (LTA). This can be necessary whether you’re gifting, loaning or acting as a guarantor and is the perfect opportunity for you all to discuss and record any third- party contribution made towards the purchase of the property and how it will be dealt with in the event of a breakdown in the relationship.

• Tenancy Agreement

If your child intends to allow another person (e.g. a partner or friend) to live at the property, a Tenancy Agreement can be a good idea. They may also want to consider a LTA to set out the responsibilities and rights of each party. This will make it clear who owns what (not just the house) and also sets the expectations for meeting the costs of living and, importantly, what would happen if the relationship were to end.

It’s always wise to give thought to how any relationship may evolve in the future. Does the agreement anticipate marriage, separation and even remarriage? Does it provide for the arrival of children? If not, it might may well need revisiting. Following a divorce, should one of the parties decide to remarry, any agreement may cease to be binding and so one should consider the need for a pre-nuptial or post-nuptial agreement to deal with such eventualities. 

What about a will?

However you decide to help, it’s highly likely that both you and your offspring will need to update your Will. It’s always worth considering the implications on your estate when buying and selling property or assisting someone else to do so. If the sum being provided constitutes an early inheritance does this need to be taken into account in the Will to ensure fairness in respect of any other children?