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30th November 2023 Helpful hints & advice

How can parents help first-time buyers?

Want to help your child get onto the property ladder by contributing to their deposit or acting as a guarantor for their mortgage? Let us explain a few of your options.

Gifting or Loaning: Key Considerations

  • Proof for Mortgage Lender: Mortgage lenders may require proof that the money comes from you. For a gift, a confirmation letter is usually sufficient, while a loan requires clear repayment terms.
  • Declaration of No Legal Interest: You might need to declare no legal interest in the property, and bank statements could be required for money-laundering checks.
  • Inheritance Tax Implications: If you gift a deposit, inheritance tax may apply if you pass away within seven years.

Mortgage Options for Parents:

  1. Guarantor Mortgages: Use savings or property as collateral, reducing your child's risk profile. Be cautious of responsibility if your child defaults.
  2. Joint Mortgages: Both you and your child are named on the mortgage and property deeds. Joint responsibility for repayments and potential second property stamp duty.
  3. Joint Borrower Sole Proprietor (JBSP) Mortgages: Similar to joint mortgages, but only your child is named on the property deeds, avoiding stamp duty surcharge.
  4. Remortgaging: Increase your mortgage on your property to free up cash. Consider the impact on your standard of living and retirement plans.

Inheritance Tax Implications:

  • You can gift up to £3,000 a year without incurring inheritance tax.
  • Unused allowances can be carried over, allowing potential gifting of £12,000 in a tax year for a couple.
  • Gifts given within seven years of your death may be subject to inheritance tax, depending on their cumulative value.

10 Tips for Parents Helping First-Time Buyers:

  1. Consult an Expert: Work with a mortgage broker to find the best deal.
  2. Update Your Will: If you buy a share in the property, update your will accordingly.
  3. Understand Tax Liabilities: Be aware of taxes associated with property and inheritance tax.
  4. Clarify Arrangements: Clearly communicate whether it's a gift, loan, or investment.
  5. Encourage Communication: Foster open dialogue with your child about financial concerns.
  6. Legal Agreements: Get legally binding agreements drawn up by a solicitor.
  7. Formalize with Land Registry: Complete Land Registry form RX1 to prevent unauthorized property sales.
  8. Discuss Home Improvements: If buying jointly, talk about potential home improvements.
  9. Honesty with Mortgage Lender: Be truthful about financial circumstances with the mortgage lender.
  10. Consider Future Rate Rises: Avoid overextending financially, considering potential future interest rate increases.

Navigating the Bank of Mum and Dad requires careful planning, legal precautions, and open communication to ensure a successful and harmonious homebuying experience.

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