Just as young adults may yearn for their independence, outside the parental home, so parents can be just as eager to speed them on their way, so that they can get on with their own plans for the future. The challenge for both sides is that houses are far from cheap. Assuming buying a property outright for your offspring is too much of a financial demand, there are basically three ways, you can help your offspring move out of the family home.
While this doesn’t directly help them onto the property ladder, it does get them out of the family home and it may improve their overall prospects, e.g. by helping them progress in their career, thereby improving their ability to buy in the future. The key point to remember when acting as a guarantor is to ensure that, if at all possible, your liability is restricted to your own child rather than potentially including other people’s children as well. In other words, you want each person to have their own rental contract with their own areas of responsibility, rather than being jointly and severally (i.e. collectively) liable for the property.
Your home may be repossessed if you do not keep up repayments on your mortgage.
Helping children to get a mortgage
The classic “bank of mum and dad” scenario used to involve parents helping their children put together a deposit and this is still one approach today, but there are other options such as offering some element of mortgage guarantee, for example Barclays’ “Family Springboard” mortgage allows purchasers to borrow up to 100% of the value of the property, provided that someone opens a “Helpful Start Account” and deposits at least 10% of the purchase price. This is returned to them, with interest, after 3 years, provided that all goes well with the mortgage. There are other companies with comparable offerings although it has to be said that this is very much a niche market and that as such the lack of competition may mean that the product offers worse value overall than a standard mortgage with a deposit. If parents do opt to help with a deposit, it needs to made clear whether the money is a loan or a gift and, if the former, what arrangements are to be made for paying it back. If the latter, it may be useful to look as to whether the gift can be incorporated into inheritance planning.
Estate planning is not regulated by the Financial Conduct Authority.
Becoming your Child’s Landlord
When considering whether or not this is an appropriate route for you, it’s important to remember that the purchase of second or subsequent residential properties carries a 3% Stamp Duty surcharge (LBBT surcharge in Scotland), assuming the property is valued at £40K or over. This applies even to parents buying properties for their children to live in (although not to parents helping their children to buy property themselves). The next key point to understand is that parents will have all the legal responsibilities of landlords (even though the tenants are their children), including making sure that whoever lives in the property has the right to be in the UK. In other words, if your child wants to share the property with someone else, e.g. a partner, their parents, as landlords, have to check their documentation to ensure all is in order. At the moment, this only applies in England although the official plan is to roll out this scheme to the other parts of the UK in future. Finally, parents need to understand that in the eyes of the law (and the eyes of HMRC) rental income from your children is still income and will be taxed as such. Prospective parent landlords also need to be clear about the fact that changes to the way profit on rental properties is calculated could see a small number of people pushed into a higher tax band for part (or all) of their income from the property.
Tax treatment varies according to individual circumstances and is subject to change.