Gregor Kleinknecht: The Bank of Mum and Dad
When I took the first tentative steps on the property ladder many years ago, buying your first home was difficult but achievable: property prices were much lower than they are now, loan to value mortgages of 120 per cent were on offer for solicitors, and generous multiples of income were applied to the amounts lent. These days are long gone. Now high property prices, deposits of up to 40 per cent and strict lending criteria are the order of the day.
TEXT: GREGOR KLEINKNECHT| PHOTO © GREGOR KLEINKNECHT, PEXELS
As a result, many first-time buyers are now more than ever dependent on financial support from parents and the so-called ‘bank of mum and dad’ has become a major player in UK property transactions. According to data released by Legal & General in 2016, 25 per cent of all homeowners received help from family and friends to buy the property they live in, a figure which increases to 32 per cent for London homeowners and to 57 per cent for those under 35.
Given the prevalence and value of such transactions, it is a good idea to obtain professional advice in advance on how they should be structured from a tax and asset protection perspective. There are broadly the following main options for parents to assist their children: (1) buying a second property in the parents’ names and letting it to the children through, for example, an Assured Shorthold Tenancy; (2) purchasing it jointly with their child; (3) giving their child the funds to purchase the property; (4) lending the funds to the child on an arm’s-length basis and on commercial terms; and (5) using a trust to purchase the property.
Depending on the individual circumstances of each case, these options will have implications for inheritance tax planning, income tax payable by the parents or trustees on rental income, the amount of Stamp Duty Land Tax payable on the transaction, capital gains tax payable on a subsequent sale of the property, and asset protection in the event that the relationship between the child and his or her partner should later break down. There is no on-size-fits-all solution and advising on these matters will involve a combination of private client, tax, family and property law expertise. If these considerations are properly balanced, both parents and children can be rest assured that they have struck the most tax-efficient deal and future proofed themselves to the extent possible.
I am grateful to my partner Graeme Fraser in our family law department and James Vernor-Miles in our residential property team for their input and assistance with this column.
Gregor Kleinknecht LLM MCIArb
is a German Rechtsanwalt and English solicitor, and a partner at Hunters Solicitors, a leading law firm in Central London.
Hunters Solicitors, 9 New Square, Lincoln’s Inn, London WC2A 3QN,
Disclaimer: The views and opinions expressed in this column are those of the author and do not necessarily reflect the official policy or position of Discover Germany Magazine.’
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