With the average house price having increased over 40% over the last 10 years*, it is increasingly common for loved ones to assist when buying property. It is important that the terms of this assistance are agreed in principle, advice taken and terms properly documented in advance to avoid unforeseen consequences.
What’s the best way of helping my child purchase property?
Gift! Example: a couple are purchasing their first property in joint names and one of the buyers receives a gift from their parents which they use to fund the deposit.
If the purchase goes ahead with the couple owning as joint tenants then the presumption in law is that, on sale, the equity in the property is divided equally, including the monies which have been gifted. Typically, this issue only comes to a head as a result of relationship breakdown and the ensuing fall-out only makes a stressful time worse for the parties. By purchasing their home as tenants in common with an appropriately drafted Declaration of Trust signed in advance of completion, then the gift can be credited to the intended recipient.
Interest in the property
Example: as above but parents are not gifting the money and expect to be repaid.
In this case, it is important to agree whether it is to be a loan protected by legal charge or whether the parents are to have a beneficial interest in the property.
If the parents are to have a beneficial interest then, again, the parties need to consider putting in place a Declaration of Trust and agreeing whether they have a fixed share representing and limited to their financial contribution, or whether they will hold a percentage of the property, therefore benefiting from any growth. One key point to consider in providing parents with a beneficial interest is that, if they own property, this could affect the Stamp Duty Land Tax (SDLT) rates and result in a higher than expected SDLT bill for the purchasers. A loan agreement and legal charge can often be the more cost effective solution.
What is a Declaration of Trust?
This is a legal document that outlines what each party owns and how the value of the property would be divided if there were ever a need for the property to be sold. A Declaration of Trust details the amount each party has contributed and how this will be redistributed if sold. It can also specify the shares of the property each party owns and the amount each party is to contribute towards any outgoings of the property. A crucial reason for having the trust deed is to also provide a contingency plan in the event of future sales and any disputes which may arise between the owning parties.
At Roythornes, we have the expertise to advise on the proposed terms of financial assistance and to draft the appropriate documentation to ensure that the purchase proceeds without any unintended consequences, whilst at the same time looking at the wider issues of tax planning.