More buyers are resorting to the Bank of Mum and Dad to fund a home
A loan or gift from Mum and Dad
A loan provides a degree of control and security over the sum lent, particularly if the loan is registered against the title to the property at the Land Registry. The loan terms may include an income return, in the form of interest, or a capital return, with an increased share proportionate to the, hopefully, increased value of the property. Given the relationship between the lender and borrower returns of either kind are unusual.
The source for a loan would ordinarily be Mum and/or Dad but it could also be a trust of which they are beneficiaries or, indeed, of which the children are beneficiaries.
A loan remains an asset of the lender(s) unless the loan is forgiven in which case it is treated for tax purposes as a gift, see below.
Before making a gift, Mum and Dad need to be willing and able to (afford) do so. Affordability is not just a short and medium term issue but needs to take into account the longer term and the possibility of expensive care costs in the future.
Mum and Dad will then need to analyse the capital gains tax consequences of selling assets, if needs be, to help fund the property. The gift will fall out of their estate for the calculation of inheritance tax after 7 full years from the date of the gift and may necessitate changes to Wills if a gift of a similar value is not contemplated for other children.
Control and security with a gift
While a transfer of funds will not be classified as a gift for tax purposes if Mum and/or Dad retain an interest in the property bought by their child, they can add notices to the title to the property at Land Registry which provide a degree of control and, therefore, security. While this may be considered to be retaining an interest, HMRC has accepted that it is not.
These notices do not allow their child to transact with the property, for example, mortgage, remortgage or sell, without the parents being notified.
Recent hurdles; a changing landscape for mortgage applicants?
However, the Bank of Mum and Dad is facing challenges beyond Mum’s and Dad’s resources being depleted by the financial reverberations of a global pandemic on asset values and job security, salary reductions and the inevitable waves of redundancies. Some lenders are introducing restrictions where the Bank of Mum and Dad are playing a vital part in making buying a home a possibility.
In July, Nationwide Building Society said it was boosting its support for first-time buyers by increasing its mortgage lending limit to 90% loan to value (‘LTV’) but at the same time it has clamped down on financial help from parents and others.
Nationwide said that for all lending above 85% LTV it would not allow a first-time buyer to rely on a deposit that had been entirely given by family members. It has set the maximum permitted gift at 25% of the deposit amount.
This could dramatically impact the amount of help relatives are able to provide for home-buyers particularly in expensive areas.