Reasons to Buy a House for Your Child
In the UK many first-time buyers are struggling to get onto the property ladder for a number of reasons not least because it is hard to save for a deposit and pass affordability calculations.
There are a number of options available to you if you’re wanting to help your child buy a property.
Which of these is most suitable for you will depend entirely on your personal situation.
This guide outlines the most common way to buy a property for your child and some of the alternatives to give you an idea of the options available to you.
Let’s explore this further.
How Does Buying a House for Your Child Work if You Get a Mortgage?
If you’re buying a house for a child in the UK, you can potentially get a mortgage to do so but you would need to be listed as the property owner for the duration that you hold the mortgage with most products.
The most common mortgage type for this type of purchase is a consumer buy to let (which is different to a standard buy to let).
Consumer buy to lets are products that are designed for anyone that becomes an accidental landlord (by inheriting a property) and for those wishing to rent to family.
There are some key differences between consumer buy to lets and standard buy to lets. The table below outlines what they are.
|Consumer Buy to Let||Standard Buy to Let|
|Regulated by the FCA?||Yes these are regulated in the same way as residential mortgage products by the FCA.||Not regulated.|
|Designed for borrowers who||Are accidental landlords (those who inherit a property and tenants) or those wishing to buy a property for family to live in.||Are buying a property for investment purposes and aim to rent the property out for profit.|
|Financial Services Compensation Scheme (FSCS) protection||Yes||No|
If you’re interested in a consumer buy to let you should contact a broker who can advise on the product and lenders available to you.
Most lenders who offer standard buy to let products also have some form of consumer buy to let product available.
Boon Brokers has expertise placing consumer buy to lets and we can answer questions about the product and provide FREE no obligation advice for your situation.
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What Responsibilities Will You Have as a Landlord?
Any rental income you make will need to be declared to HMRC and will be subject to income taxes.
You will also have additional responsibilities as a landlord:
- You will need to ensure the property is kept safe and meets relevant health standards.
- Gas and electrical systems will need to be installed and maintained correctly.
- Provide an Energy Performance Certificate.
- Use a tenant’s deposit scheme to protect their deposit.
- In England, you will need to conduct additional checks to ensure your tenant has the right to rent.
- Provide your tenant with a ‘How to Rent’ checklist when you first become their landlord or when they start to rent.
These responsibilities are outlined by legislation and penalties for failing to meet them can be severe.
Benefits of Buying a House for Your Child
There are a number of benefits if you’re considering buying a house for your child.
The first (and often primary) advantage is that as a parent you will be able to assist your child towards their own independency and you are in control of their residential security.
There are also a few tax benefits that could apply if you buy a house for your child.
The three largest benefits are:
- Investing in your child’s self-sufficiency
- Taking advantage of gift tax
- Potential to save on estate taxes
Below we go into more detail about each of these benefits as well as providing alternatives to help buy your child a house.
Investing in Your Child’s Self-Sufficiency
In 2022 there are numerous problems facing first time buyers that make it difficult to get onto the property ladder.
The economy is in a constrictive phase and the cost of living crisis is wreaking havoc on most people’s expenses.
Compounding this problem, the property market remains overly buoyant and house prices are increasing month on month.
This economic outlook means you might find your child is simply unable to afford the deposit to put down on a house and even if they can, the ongoing monthly mortgage payment (alongside other household expenses) are likely to be a struggle for most.
Buying a house for your child enables them to focus on building their life and independence without the burden of additional costs associated with being a first-time buyer.
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Taking Advantage of Gift Tax
In the UK you’re allowed to gift money to your child without tax.
The threshold for gifting isn’t particularly high though so you may still have a tax liability.
If you would like to gift money so that your child can buy their own house, you can take advantage of taxes around gifts.
You can gift up to £3000 each year and if you haven’t gifted money in the previous year, you can carry over the £3000 from last year.
That equates to £6000 per parent gifting the money which would be considered tax free.
For two parent families you can effectively gift £12,000 to your child without tax implications providing that neither of you have gifted in the year previous and carry over your allowance.
If you survive for 7 years after the gift is made, then there are no taxes.
If you pass away within 7 years of a gift and it is over the tax-free allowance, then you will be liable for tax over that amount.
This rule is effectively to prevent people giving away their money on their death bed and avoid paying inheritance tax.
If you’re considering giving money to your children to buy a property it is best to seek advice from an accountant to get a better understanding of any tax implications.
Potential to Save on Estate Taxes
This area is a little more convoluted if you plan to buy the property for your child rather than give them the money to buy the property themselves.
When you buy a property, you can nominate them to legally own it in the future.
But in the first instance it will be considered a second home if you already own a property.
Additional properties in the UK incur a higher rate of stamp duty which is a 3% surcharge on top of the basic rate of stamp duty.
Stamp duty can be a big factor for you if you’re deciding whether to gift money or buy the property yourself.
Gifting money to a first-time buyer to fund their deposit allows them to purchase a property up to £300,000 without incurring any stamp duty liability.
If you decide to buy the property, passing on the property can be done in one of two ways through your estate when you die or via a gifting process.
If you gift the property you will need to discuss with your accountant whether you’re liable for capital gains tax.
If the property goes into your estate, then you may find inheritance tax (IHT) comes into play.
Leaving a property to your child (or grandchildren) does increase the threshold of IHT to £500,000 if your estate is less than £2 million overall.
But you will still find anything over this threshold (£500,000) is charged for IHT.
Once again you should carefully consider your options and the tax implications of each option to decide which is best for you and your child.
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Putting a Property in Trust
Taxes can be a concern when buying a property for your child.
Buying a property and putting it into a trust can be a solution to taxation as it allows your child to reside in the property without paying rent and inherit it when you die.
This is helpful for most of the taxes we have mentioned including income tax, inheritance tax and capital gains tax.
However, putting a mortgaged property into trust is not simple.
The mortgage lender may reject the request to transfer the property into trust. This is why it is common for unencumbered properties to be transferred to trusts instead.
Trusts are complicated though and there are many different ways to set up a trust.
Some of these complications incur financial penalties of their own such as inheritance tax being charged upon setting up the trust and anniversary charges.
A financial adviser or trust adviser will be able to outline how trusts work in more detail and advise about whether a trust would be appropriate for you.
Alternative Ways to Help Your Child Buy a Property
Aside from gifting the money to a child to buy a property or using a consumer buy to let there are other options that may be preferable to you.
These are uncommon in the UK as many lenders are reluctant to lend on the basis of a guarantor.
However, it is worth noting that if you’re looking to help your child buy a property a guarantor mortgage may be worth considering.
Guarantor mortgages allow your child to obtain a mortgage and if they miss any payments you guarantee to cover the payments.
To obtain a guarantor mortgage you will have to meet all of the mortgage requirements yourself.
This is because you will need to demonstrate that you can repay the entire mortgage in the event that the person you are guaranteeing doesn’t meet their obligations.
Gifted deposits are very common in the UK and many first-time buyers rely on money from family to boost the amount they can put down as a deposit.
Some lenders have restrictions on the amount of gifted deposit they will accept.
They might require that the percentage of deposit gifted is 25% or less of the total deposit amount.
Other lenders are more flexible. Your broker will be able to highlight which lenders are best for your circumstances.
When you make a gifted deposit, you will need to sign a document that essentially signs away your right to the money.
You won’t be able to loan money and expect repayment on a gifted deposit as this will not be acceptable to the lender.
The reason for this is lenders will be concerned about affordability and the borrower’s ability to repay the mortgage.
If they feel they have additional financial commitments to family members for the deposit they will perceive the mortgage as having a higher risk of default.
Joint Borrower Sole Proprietor Mortgages
This product is likely to be one of the most appealing options if you’re specifically looking to buy a property for your child.
It allows you to buy a property on a joint mortgage basis (with up to 4 borrowers) and nominate your child (who would also be on the mortgage) as the sole proprietor.
This means you would have no rights over the property but would be equally responsible for mortgage payments.
Like other mortgage products in this article there are benefits and drawbacks to a joint borrower sole proprietor mortgage.
Boon Brokers will be able to provide advice specific to you and help you understand whether a joint borrower sole proprietor mortgage is best for you.
Helping a child buy a property isn’t necessarily a straightforward process and there are many different ways and products to do just that.
Fortunately, there is likely to be an option that meets your needs when it comes to helping your child onto the property ladder and while some options may not be appealing, others may be desirable.
Boon Brokers is a whole of market mortgage, insurance and equity release broker.
We have helped parents to get their children onto the property ladder by using either joint borrower sole proprietor mortgages or consumer buy to lets.
These products have specific requirements and are not typical mortgage products they require a great deal of expertise to provide advice and apply for them.
Contact Boon Brokers today for assistance with helping your child buy their first property and we will give FREE no obligation advice to help you (and your child) on your way.