Your children are ready to fly the nest and, like many parents, you want to give them a helping hand on to the first rung of the property ladder. Well, the near relentless rise in property prices over the last six decades has delivered opportunities and obstacles in almost equal measure - which we’ll come to in a moment.
But the focus on the financial practicalities of how you might help your children to buy their first home often obscures a much more fundamental question that you really ought to consider before you start talking about the money.
Of course, your children may simply want to move to a new address, in which case fine; the capital you gave them is simply transferred to a new property. But what happens if a recession costs them their job through no fault of their own and they struggle to pay their debts? What happens if they divorce and their former spouse claims half of the property? In both cases, much of the value of the property – including your generous contribution – can go to meeting the claims of creditors or a former spouse.
There are several options, but first, a brief comment on the finances. The good news is that your family home has probably risen significantly in value since you bought it. In 1990, the average house price in Scotland was around £35,000. Today it is just over £165,000. You can use that capital gain to help your children with their first purchase - without having to sell your current home if you wish.
But the very increase in house prices that makes it possible for you to help your children also makes buying a house today more expensive than it was when you started out.
House price growth has been outpacing wage increases for decades and, while property is still more affordable in Scotland than many other parts of the UK, the average Scottish house price is now 4.7 times average earnings. Luckily, low interest rates have helped to make larger mortgages more affordable, but the increase in house prices means that the size of any deposit has to be that much larger. The average deposit in Scotland is around 15% of the purchase price, so roughly £25,000 for an average property.
That can be a tall order and there are plenty of reasons why you might want to buy with a larger deposit. If, for example, your children are just starting out on their careers, their starting salary may not be enough to cover the monthly mortgage payments without a larger deposit at the outset. And if your children are still at university, you might want to buy a property outright, rather than with a mortgage.
Whether you are planning to buy outright or make a contribution to a deposit, your financial commitment is likely to be significant.
One option is just to buy the property in your own name. In many ways, however, that’s not really helping your children to own a property – because you own it, and there are tax disadvantages if you already own a home. The purchase will be liable to the Additional Dwelling Supplement – a tax of 4% of the purchase price on top of the normal Land & Buildings Transaction Tax, while any increase in the property value will be liable to capital gains tax.
A second option is to secure an interest in the property – a bit like a bank does when you take out a mortgage. This involves taking out what is known as a ‘Standard Security’ over the property which means that your children can’t sell the property without repaying your contribution. But while a Standard Security can protect your contribution if your child is declared bankrupt, any creditors will have first call on the free proceeds from a sale once the debt owed to you has been repaid, and that is also likely to be true in the event of a divorce.
A third option, and one that is becoming steadily more popular, is to set up a trust to buy the property.
You put funds into the trust, the trust buys the property, your children live in it (as the beneficiaries of the trust) and pay the mortgage, but you control the trust as the trustees. Since the trust is the owner of the property, your children can’t sell it or borrow against its value without your permission. For the same reason, the property won’t be affected by a divorce or by a claim from creditors, because your children don’t own it.
In practise, the trust will be little different from your children owning their own home. If, for example, they wanted to move house, the trust can sell the property and buy another or pass the proceeds to your children for use as a deposit on another house. Ultimately, when the time is right, the trust can transfer ownership of the property to your children.
As well as securing the funds you contribute to the purchase, a trust has the added benefit that those funds are generally no longer included as part of your estate for Inheritance Tax purposes.
The advantages are considerable, and possibly compelling. But there are tax implications you should bear in mind. The purchase will be liable to the Additional Dwelling Supplement if you own your own home and any increase in the property value will be liable to capital gains tax because the property is not the trust’s principal residence.
If a trust appeals to you as a safer way to help your children move in to their first home, you will need a solicitor to set it up for you and it is hugely important that it is done correctly. Apparently simple decisions can have unexpected implications and ambiguous wording can cause confusion later on, so make sure you choose a solicitor with both expertise and experience in this field.
If you need any advice about helping your children get on the property ladder, please do not hesitate to get in touch.
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