How Bank of Mum and Dad can protect money lent or gifted

Nigel Shaw, Tax expert at Garbutt and Elliott, on how the Bank of Mum and Dad can safeguard the money they lend or gift:

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Many of our clients ask how they can financially help an adult child or grandchild to get on the residential property ladder.A lot will depend on the ages of the children or grandchildren and their current marital status, while taking into account whether they are intending to cohabit or live alone.Not surprisingly, our clients do not want to see any chance of the financial support being lost in the event of a relationship breakdown and so we often talk to them about Declaration of Trust. These explicitly set out the respective shares and contributions made towards a property purchase. This goes some way to identify, at the outset, a family member’s specific interest in a property.Depending on the level of financial support, it is generally more cost effective and less complicated from a tax perspective for a direct gift to be made to the child or grandchild (usually for the house deposit) and this should be documented at the date of gift, especially if other non-family members will be occupying the property.Usually, a gift in this manner will be of existing cash funds from the bank of Mum and Dad or a lifetime transfer from grandparents instead of a legacy under their wills. Either way, such gifts will usually be regarded as a PET (potentially exempt transfer) and require the donor (parent or grandparent) to survive a seven-year period from the date of gift. Care is needed if there were earlier gifts by the donor, which could crystallise a charge to Inheritance Tax in the unfortunate event of the donor not surviving the seven-year period.Interestingly, a recent paper by the Labour Party entitled “Land for the Many” proposes a Lifetime Gifts Tax to replace Inheritance Tax, with a charge levied on the recipient above a much lower lifetime threshold of just £125,000 – at this level it is unlikely to support a property purchase in many parts of the UK.An alternative to direct gifts is to consider a soft loan or zero interest mortgage to the child or grandchild. Many clients want to offer financial support but might take the view that their offspring need to appreciate the value of money more and should learn to budget properly. If the financial support is done in this way you will need to thoroughly review both the tax implications and the impact on the security of the loan – especially if there is a primary legal charge from a separate financial institution.Usually, the parent or grandparents will start off the financial support as a soft loan and then once the property is occupied for a number of years and the child/grandchild’s relationship is stable, they will look to waive the loan amount with the consequences that it will be treated as a direct gift, as mentioned above.At all stages of the financial support it is important to document in writing the precise nature of the arrangement you are entering into. This will mean paying some professional costs but these will be well worth the money, in order to have clarity between the partiesIf, for whatever reason, the child or grandchild you are supporting lacks financial maturity, or may have health or other personal issues, you should consider a Family Trust to own the property on their behalf. Once again there will be tax implications. This route is often taken to guarantee peace of mind or to protect a younger more vulnerable child or grandchild, while giving them the freedom to live independently.