Bank of Mum and Dad: Risks revealed
New research warns parents to be alert to unexpected costs when helping their offspring take their first step on the property ladder.
These are set out in a new guide from Royal London, drawing attention to a number of factors which parents should be aware of before helping to fund a housing deposit.
Entitled ‘The Bank of Mum and Dad – Five things to consider before opening a branch’, the guide covers issues such as taxation, something which may be of concern where the parent’s names appear on the property deeds. If they already own a property themselves, the home their helping to buy may be subject to the high rate of stamp duty land tax. Capital gains tax could also apply if the home is sold above its original purchase price.
Another risk mentioned in the guide is the possibility of falling short in the future. As well as falling house prices, the money could also be lost following relationship problems and loss of equity. It is therefore important that a written agreement is set out prior to the money being contributed, regardless of whether it is a gift or a loan.
Along with the risks involved in assisting children with their first home purchase, the guide also sets out alternative ways that parents can help their offspring access the property ladder. As well as releasing equity from their own home to raise funds, it suggests acting as a guarantor or using a Lifetime ISA.
Commenting on the research was Helen Morrissey. The personal finance specialist at Royal London highlighted the rise in parental contribution has led to an increase in exposure to risk. Whilst acknowledging that they want to provide their children with the best start, she stresses that parents should be made aware of these risks in order to not lose out in future themselves.
“Steep house price rises in recent years have made it difficult for younger people to get on the housing ladder and it is understandable that parents want to help. However, making the decision to hand over a large sum of money, whether as a loan or a gift is a major financial commitment and parents need to consider all the options before deciding to do this. Parents must ensure they are aware of the potential tax implications and consider giving away or lending a large sum could affect them further down the line if their circumstances change.
“In addition, arguments over whether money needs to be repaid, or over what time period, have the potential to cause considerable harm to the parent/ child relationship. It may seem very formal but all parties should consider taking legal or financial advice and if needs be, get something down in writing. Taking this approach can bring much needed clarity to the process and save both parties a lot of grief.”