As demand for property continues to outstrip supply and prices continue to rise accordingly, many parents are left wondering whether ‘empty nest syndrome’ is set to become a thing of the past.
With it becoming more and more challenging for first time buyers to get a foot on the property ladder, many offspring have little or no opportunity to fly the nest. Right now, ‘the bank of mum and dad’ (or other close relatives) seems the obvious solution but before plunging in head first there are considerations.
What are the options and what should you consider when providing such assistance?
This is the preferred option in the majority of cases. However, although obvious, you should consider a gift is an outright gift. As such, the person in receipt of the gift can do what they wish with it, for example, transfer the property into joint names with another party or sell the property and spend the money!
If the family member is purchasing the property with another party then you need to consider what happens if relationship breaks down – it is possible the additional party would benefit from the original gift which may not have been the intention.
It is possible for a document called a declaration of trust to be entered into between the co-owners specifying their particular shares in the property which may provide some comfort in this particular instance.
You should also consider that gifting large sums of money may have tax implications and take advice accordingly. Some lenders are now restricting parental contributions.
If the family member is purchasing the property with the assistance of a mortgage (as most people do), the gift will need to be reported to the mortgage lender. As such you will be required to provide a letter confirming that the money is an outright gift and declaring that you will have no interest in the property.
If you are planning to occupy the property this may not be acceptable to a mortgage lender.
Protection of your Money
If you lend the money with a view to keeping some control over it, it is possible to protect your equity in the property by way of a declaration of trust. This may be backed up by a note of your interest on the register of title or a more formal restriction preventing certain dealings with the property without your consent.
It is possible to protect your money both by way of a fixed sum or a percentage share which would increase or decrease depending upon the value of the property.
Any such arrangement would need to be reported to any mortgage lender and may or may not be acceptable to them.
For added protection you could take a charge over the property – this would enable you to force a sale of the property if it all went wrong. Again, if the family member was purchasing the property with the assistance of a mortgage, the mortgage lender’s consent would need to be obtained to the second charge, and you should remember their charge would take precedent over yours. Once again, the lender (building society/bank) may or may not consent to the second charge and any corresponding restrictions on sale.
A share in the property
You may wish to purchase the property jointly with the family member. You should consider you would generally need to be added to any related mortgage and, if the family member were to default on the mortgage payments, the lender could look to you to repay the debt.
A share in a second property may have tax implications for which further advice should be sought. Note in particular from April 2016, higher rates of stamp duty are payable on purchases of additional residential properties.
From a purely practical point of view this may also affect any future property purchases of your own. For example if mortgage finance was required from an affordability point of view and access to your money tied up in the property.
In all circumstances you will be asked to provide identification documents, together with evidence of the origin of the funds provided. Copy bank statements are usually required. Further declarations may also be required as to your solvency.
If your ‘little brood’ is crowding your nest then perhaps it’s time they moved on…with a little help and encouragement, getting that all important first foot on the rung will help them spread their wings. Just make sure that neither you nor they, land with a bump.