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Tax implications for parents helping children to buy property

First-time homebuyers are still finding it a struggle to get on the property ladder. Increases in house prices, mortgage rates, and the cost of living are making it harder than ever for would-be buyers to save up a deposit large enough to purchase their first home.

As a result, many young people are turning to their parents for financial support, also known as ‘the bank of mum and dad’. Almost half of first-time buyers under 35 years old needed financial help from their parents, whether through a gift, loan, or joint mortgage.

However, even with the best intentions, it’s not always wise for parents to give a significant amount of money to their child this way. If it isn’t planned carefully, there could be tax consequences down the line that practically wipe out your initial financial gift.

Here are the main taxes you need to think about before helping your children to get on the first step of the property ladder, and how they could affect such a financial transaction in the long term.

Inheritance Tax

If you give your child some money to go towards their deposit as an outright gift, there may be no tax due for them or you at first.

It will count as a gift under Inheritance Tax (IHT)
rules, which set an annual limit of £3,000 per person for tax-free gifting. However, you can carry over unused allowances from the previous year – so if two parents hadn’t gifted any money in the last 2 years, they could both gift £6,000 each to their child, for a total of £12,000

The only concern is that if the parent gifting the money was to pass away within 7 years, and their total estate (including the financial gift) was worth over £325,000, then the child could be liable for an IHT payment of up to 40% as the recipient.

The amount they’ll have to pay depends on how many years have passed since the financial gift was given at the time of the giver’s death. The IHT rate starts at 40% for the first 3 years, reducing by 8% for each year after that until 0% is reached if the parent passes away after 7 years or more.

An alternative option is to set up an interest-free loan arrangement, ensuring that you eventually get the money back from your child and avoid the IHT implications of a non-repayable gift. This would require a solicitor drawing up a legal document setting out the repayment terms and what happens if anyone involved passes away before the fulfilment of the contract.

Additionally, the child must declare the loan agreement to any other lenders if they’re also applying for a mortgage. Factoring these repayments into their outgoings could have an impact on lenders’ mortgage affordability calculations, potentially limiting the deals they can apply for.

Stamp Duty

Rather than gifting or loaning money, some parents might consider joint ownership of their child’s new property. However, buying a property with your child is likely to incur Stamp Duty.

Stamp Duty Land Tax (SDLT) is charged on purchases of residential property valued at £250,000 or above. You’ll have to pay 5%
on anything between this amount and £925,000, then 10% on any amount between this and £1.5 million, and 12% on anything above that.

In England and Northern Ireland, Stamp Duty relief is available if the property is the buyer’s first home, allowing 0% SDLT
up to £425,000. The problem is that if you, as a parent, have bought a property before, the joint ownership won’t qualify for this relief.

Not only will you have to file and pay SDLT within 14 days of completing the property purchase, but parents who already own a property must also pay a 3% SDLT surcharge, because it will be counted as a second home.

For example, if you were to jointly purchase a property worth £300,000 with your child, the Stamp Duty Land Tax breakdown would look like this:

  • 3% on the first £250,000 = £7,500
  • 8% (5% + 3%) on the remaining £50,000
    = £4,000

You would therefore pay 11% SDLT totalling £11,500, when your child buying on their own would be able to avoid SDLT on this property price under the first-time buyer relief scheme.

Capital Gains Tax

Another tax issue with joint ownership is that purchasing a second home with your child when you already have a main residence means that the second property will be considered an asset, and therefore subject to Capital Gains Tax (CGT) when it’s sold.

Should your child want to sell the property that you jointly own further down the line, and it’s increased in value since the initial purchase, then you’ll have to pay CGT on your half of any gains made from the sale. Neither of you will be able to benefit from Private Residence Relief for selling main homes.

If you’re a basic rate Income Tax payer, you’ll end up paying 18% on the gains made from selling the residential property. However, if you’re a higher or additional rate Income Tax payer, then you’ll have to pay 28% on the gains from the property sale.

While it’s possible to reduce taxable gains by deducting valid costs, such as legal fees and maintenance, the annual CGT allowance has been slashed to £6,000 in 2023 and will drop again to £3,000 in 2024. Unless your gains are lower than this, you’ll be facing a CGT bill.

One way to avoid this is by gifting your main residence or family home to your child, making the transfer eligible for Private Residence Relief, and entitling you to a partial or full CGT exemption. However, that leaves you needing to buy another home for yourself – or you could continue to live in the family residence with your child as the homeowner.

If you continue to live in the property, you must pay rent to your child at the market rate, otherwise it could still be considered part of your estate, triggering Inheritance Tax when you pass away.

Tax advice for the Bank of Mum and Dad

As frustrating as it can be, it’s important to always consider tax liabilities before gifting large sums of money or pursuing joint ownership property purchases. This can even include Income Tax – if you set up a loan agreement to avoid IHT but charge interest on the loan, then this can be classified as income and taxed accordingly.

For more information on ways to help a child buy their first home, you can view the HomeOwners Alliance guide on this topic. Alternatively, if you require professional tax advice on the allowances and reliefs mentioned in this article, you can contact GBAC. Our accountants in Barnsley can provide detailed tax guidance tailored to your circumstances.