Bank of Mum and Dad; “Getting it together”

Three blogs have been posted on legal issues arising where the Bank of Mum and Dad gives a helping hand. With reports that the Bank of Mum and Dad is now one of the biggest lenders with over £6 billion expected to be advanced in 2019, now seems a good time to bring them together and review the issues discussed in the blogs.

A recent report on lending by the Bank of Mum and Dad was produced by Legal and General using data from the Centre for Economics and Business Research.  It says that in 2019 year the average amount being passed down has risen by more than £6,000 to £24,100.

The total expected to be advanced in the year is £6.3 billion, supporting purchases worth £70 billion. The report makes the point that the Government’s long standing Help to Buy equity loan has helped fewer people to buy than the Bank of Mum and Dad does in a single year, now helping in nearly one in five transactions.

Occasionally the parents might be in a position to sell a property to a son or daughter at less than full value.  In the first blog, on concessionary purchases, Mark and Helen are looking at selling to their daughter Sophie the family home worth £510,000.  They will receive the sum of £400,000 and are to downsize.  Sophie needs a mortgage, the blog considers how this can limit the freedom of action:

• The lender’s requirements might mean the sale has to be structured as a “gifted deposit” with the lender insisting that Mark and Helen sign a document confirming that they have given Sophie £110,000 so the price is £510,000. An unfortunate consequence is that first time buyers’ relief for stamp duty land tax (SDLT) would not be available as the price for the mortgage offer, any contract, the transfer and for SDLT purposes would be over the £500,000 upper limit.
• The SDLT position would work out better if the lender accepts a “gifted equity” arrangement (also sometimes called “concessionary purchase” “transfer at undervalue” “family discount” or “genuine bargain price”) when the price on the legal documents would be £400,000 and first time buyers’ relief could be available.

This first blog also considers the inheritance tax and capital gains tax positions for Mark and Helen.

A couple who have sufficient funds to buy a property when their daughter Celeste is at university are considered in the second blog.  A number of strategies are considered:

1. The parents buying the property themselves and letting it to Celeste and other students.
2. They buy the property and let it to Celeste who can then receive income from fellow students.
3. The money is lent by the parents to Celeste and she buys the house.
4. A gift is made of the money to Celeste so she can buy the house.
5. The parents could set up a trust, put the money into that and the trustees could buy the home and allow Celeste to use it.
6. Another permutation considered is for the money to be put into the trust and the trust lend money to Celeste who could buy the property.

The blog gives an analysis of the SDLT, income tax, capital gains tax and inheritance consequences of each structure as well as considering some practical issues.

The most recent blog is about helping a child who will also have a commercial mortgage.  The parents are Den and Karen, their son is Richard.  The options considered are:

1. Den and Karen be joint buyers with Richard, with Den and Karen taking a share of the property. The shares of the ownership would normally be set out in a declaration of trust.
2. They could (if the commercial lender will allow it) lend Richard the money they have available, perhaps with the security of a second charge.
3. They could gift Richard the money if they are confident they will never need to ask for the money back.
4. A “joint borrower sole proprietor” type mortgage (also called a “joint mortgage sole owner” mortgage) could allow Richard to borrow at lower rates whilst owning the property with Dean and Karen accepting joint liability on the mortgage (some old style “guarantor” mortgages are still available too).
5. Den and Karen could put their money into a bank account with the lender to allow Richard to obtain a better deal on a form of offset mortgage. The lender has access to this money if mortgage repayments are not made.

Again this third blog gives an analysis of the SDLT, income tax, capital gains tax and inheritance consequences of each as well as looking some practical matters.

The Legal and General research finds that in 59% of cases the money is a gift with no requirement to pay it back.  A further 14% of borrowers receive a mix of a gift and loan. Only 6% of those who received financial help were charged interest. Among those who are providing the help, only 8% say they have taken or would want an equity stake.

Not all parents had the money to hand or easily available from savings.  The research found:

• 16% used equity release
• 14% downsized
• 9% helped by cashing in their pensions as a lump sum
• 6% took out further borrowing themselves.

For professional advice on SDLT please contact Blake Morgan’s SDLT expert, John Shallcross.  For advice on income tax, capital gains tax or inheritance tax contact private client specialist Paula Shea.

This article is intended for general information purposes only and does not constitute legal or professional advice. Advice should be sought before proceeding with any transaction.

This article was originally posted by John Shallcross on 30 September 2019.