The property market has rarely been more hectic with mortgage lending and house prices rising strongly. No wonder then that many parents are anxious to help their children secure a first rung on the property ladder before it is out of reach.
That is easier said than done. House price growth has been outpacing wage increases for decades and, while property is still more affordable in Scotland than many other parts of the UK, the average Scottish house price is now 4.7 times average earnings. Of course, mortgage rates are far lower than they were making the monthly mortgage repayment less expensive per pound borrowed, but buyers still have to come up with a deposit which, in Scotland, is generally around 15% of the purchase price. Registers of Scotland calculate that the average house price in Scotland is just over £161,529, which means that the average deposit is almost £25,000.
While it’s possible to buy a property with less than a 15% deposit, the higher the deposit, the lower the monthly mortgage payments. For children starting out on a career, those monthly payments may be more than they can manage with their starting salary, so a much higher deposit is often necessary or at least advisable. And if your children are still at university, you might want to buy a property outright, rather than with a mortgage.
The good news for parents who bought their home many years ago is that the value of your property has almost certainly risen substantially. You can use that to raise funds by downsizing, by guaranteeing a mortgage taken out by your children or through equity release. There are numerous options and best way to fund the purchase is a question for a separate article, but there is perhaps a more important question that you should be asking first before you consider the finances.
What happens if your children own the property you buy for them and then run in to trouble? Say, for example, that a recession costs them their job and they can’t repay their debts. Say they decide to sell-up and travel the world funding their journey with the proceeds of the sale. Say a divorce creates a claim, as it probably would, from their former spouse for a share in the value of the property.
In these circumstances, your generous and careful contribution to your children’s future evaporates, or at least shrinks in size.
Can you protect yourself, and your children, from just such an eventuality?
One option is simply to buy the property in your own name. But, if you already own a home, the purchase will be liable to the Additional Dwelling Supplement – a tax of 4% of the purchase price on top of the normal Land & Buildings Transaction Tax. Moreover, any increase in the property value will be liable to capital gains tax. Don’t forget too that the property would be included as part of your estate in the event of your death, it won’t belong to the child you bought it for.
Another option is to secure an interest in the money invested in the property. In this case, you can take out what is known as a ‘Standard Security’ over the property. You set the terms under which the money you contributed to the purchase has to be returned – but it is most commonly when the property is sold.
That means that your children can’t sell the house without repaying your contribution. But, whilst a Standard Security can secure the initial amount of money provided and, potentially, interest, if your child is declared bankrupt any creditors will have first call on the free proceeds of the property after repayment of the money and interest due to you. Also, in the event of a divorce, your child’s former spouse may still have a claim on their share of those free proceeds.
Another option that has been getting more attention recently is the creation of a trust. In this scenario, you create a trust with parents or grandparents as trustees and your children as beneficiaries. The trust buys the property and your child or children live in it. Because the trust is the owner of the property, your children can’t sell it or borrow against its value without the consent of you – the trustees. Since you child doesn’t own the property, it won’t be affected by a divorce or by a claim from creditors against your child.
The trust can sell the property and buy another if you children want to move and it can ultimately transfer ownership of the property to your children or sell it and pass the free proceeds to your children – possibly for use as a deposit on another house. Another attraction is that the money paid into the trust to enable it to buy the property is generally no longer part of your estate for Inheritance Tax purposes.
A trust has a lot of advantages, especially if you are buying for relatively young children, but there are tax implications. The purchase will be liable to the Additional Dwelling Supplement if you own your own home. And any increase in the property value will be liable to capital gains tax because the property is not the trust’s principal residence.
You will normally appoint a solicitor to set-up a trust for you. But doing so is potentially complex and apparently simple decisions can have unexpected implications. If this is an option you are considering, it is important – for you and your children – that it is done correctly and for that, you need to consult a solicitor with specialist experience and expertise in this field.