Increasing number of first-time buyers in the UK are turning to ‘BOMAD’ to help get a foot on the property ladder.
BOMAD has become, for many under the age of 35 years, the only route into homeownership especially since the financial crisis. This is because lenders have tightened their criteria for lending which means that a bigger deposit is needed to get a mortgage.
If you are contemplating making a financial contribution to assist your child in purchasing their property, it is crucial that you decide whether you wish to make a gift or whether the financial contribution will be a loan.
If the financial contribution is a loan, you must draw up a loan agreement which sets out the terms and conditions of the loan, including the loan term and the interest rate. You could also consider putting a second charge over the property. Having a second charge over your child’s property will mean that your loan will be repaid after your child’s mortgage provider has been repaid in full. This is on the presumption that the value of the property is enough to cover the loan owed by your child to their lender and to you. Although a second charge is not as good as having a first charge, it nevertheless provides a degree of protection and security. It is of course a different matter whether or not your child’s lender will consent to a second charge over the property.
If your financial contribution is a gift and if your child is buying the property with a partner, you need to consider what will happen to your child’s share of the equity if your child and their partner split up. It is therefore advisable to put in place the following preventive measures:
- Your child and their partner should draw up a ‘declaration of trust’ that states exactly who owns what share in the property in the event of a sale.
- Have a cohabitation agreement between your child and their partner before they get married;
- Your child enters into a pre-nuptial agreement prior to marriage and/or a post nuptial agreement after the marriage;
If your financial contribution is a gift, the timing of making the gift and method of the gift is crucial. Gifting an amount of money is not as straightforward as transferring a payment into a bank account. There is a process to be followed, and both parties (Donor and the Donee) should be aware of the tax implications that are involved in gifting money. Although, you can gift any amount of money you like to your children without being taxed immediately, however, if you die within seven years of the transaction there could be tax implications
For some parents giving an outright gift to their children may not be the best solution. There are alternatives to gifting money some which are listed below.
- A number of mortgage products are now available in the market that allow parents to help their children onto the property ladder without giving them a chunk of cash.
- You could act as a guarantor for your child, where a lender puts a charge on your property
- Your child could use products such as the Post Office’s Family Link mortgage, which allows you as the parent to use the equity in your home to provide security for a deposit
- You could become a shared owner of the property. However, the property could then be regarded as a “second home”, which means you will be charged a higher rate of stamp duty land tax.
There are numerous factors which need to be addressed prior to giving funds to your children to help them on to the property ladder. You must consider your and your child’s personal circumstances before taking a decision. Whatever you decide, you should have appropriate legal documents in place to reflect the arrangement. This will minimise the risk of any potential difficulties and complications in the future.
It is best to seek legal advice prior to making large gifts or loans or entering into other arrangements with your children or other family members. The solicitors at Connaughts can advise you on how best to protect your and your children’s interests.
Please call or email Kiran or her team to discuss your situation and your particular requirements.
Note: The information contained in this article is intended to provide general guidance only and shall not be deemed to be or constitute legal advice. Connaughts accept no responsibility for any loss as a result of acts or omissions taken in respect of this article.
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