A Helping Hand onto the Property Ladder

October 5, 2018

In the current climate of high property prices and strict rules for mortgage lenders, more and more people find it very difficult to take that first step onto the property ladder, or to move into larger accommodation as families expand.  For families offering a helping hand the following factors should be taken into consideration:

Is it a Gift or a Loan?

This is a very important decision and not just based upon kindness or affordability.  If the money is to be loaned it is important to be clear about what those repayment terms are from the outset, as this avoids family members falling out due to misunderstandings of when the loan is to be repaid.  A simple document recording terms can avoid substantial arguments and unnecessary expense trying to sort things out in the future.

If the money is a gift this can still have complications particularly if the property is being purchased by a couple. It is important to be clear about whether the gift is to your family member or to the couple. If it is a gift to a couple then it cannot be taken back if the couple separate in the future.

Where is the money coming from?

All solicitors now have a duty to investigate the source of any funds used towards the purchase of a property.  If, therefore, you are considering either gifting or loaning money to family members you should be aware that the solicitor acting for those family members will at the very least need to see a bank statement evidencing that those funds are held within an account in your name and  copies of identity documents to prove that you are who you say you are.

Will it affect their mortgage?

We would always recommend checking whether the proposed gift or loan will affect a mortgage application.  The existence of a loan in relation to deposit monies can affect the mortgage company’s decision as to whether the mortgage is affordable. If the money is a gift expect to be asked to confirm this in writing and you should be aware that once you have put it in writing you cannot later claim that it was a loan.

What are the tax implications?

Whether the money is to be a gift or a loan it is always important to take appropriate advice on the tax implications. Depending upon your circumstances and the arrangement reached you may be liable to Capital Gains Tax, payable on the value of the gift, income tax due on any interest payments, and Stamp Duty Land Tax, if you agree to take a legal interest in the property in return for the monies put towards the purchase price.

What happens if the relationship breaks down?

Where money is being advanced for the purchase of a property by a couple, careful thought should be given as to whether the gift is only to the family member or jointly to the couple.  We would always strongly recommend that this is recorded in writing as this will avoid argument and the likely expense of legal fees should the relationship break down in the future.

Alternative Arrangements

In addition to gifts and loans we regularly assist our clients with Trust documents recording who owns shares in the property. Where appropriate, we also advise clients who are receiving a gift from parents, of the benefits of entering into either a cohabitation agreement or a pre-nuptial or a post-nuptial agreement. These agreements can protect a large gift from a family member to ensure that if the relationship does break down the gift does not get swallowed up as a matrimonial or jointly owned asset.

Our advice would always be to spend time carefully considering what steps you are taking, and at all times take legal advice before committing to any arrangement.

For detailed advice and assistance contact our experienced property and family law solicitors Nicola Codd and Ikram Dola at Baines Bagguley Penhale’s office on 01524 401010.

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