Parents warned over home loans to children

Published 03rd Feb 2009

Parents who want to help their children buy their first home should be careful about how they provide financial support, the president of the Law Society has warned.

Estate agents are beginning to report increased numbers of first-time buyers showing interest in property, with London-based Cluttons last week claiming healthier levels of enquiries and viewings were leading to offers being made and accepted within a month of a property being marketed, as buyers begin to vie for fewer and more competitively priced properties.

Many parents may regard it worthwhile lending or giving money to their children to use as a deposit so they can buy a decent home while prices are low. In fact, despite average house price falls of 16.6% over the past 12 months, the unwillingness of most banks and building societies to lend much more than 75% of a property's value means almost eight out of 10 first-time buyers in London are being forced to ask their parents to step in with financial help.

But Paul Marsh, president of the Law Society, warned such a move could be "fraught with difficulties". "People don't think through the consequences or take appropriate advice," he said. "There's a very big difference between giving or lending to your daughter if she is getting married or starting up a home with a partner. But you need to be cautious in both instances."

There are three ways for parents to help out their children: through an outright gift, as an interest-free loan, or as an investment, but the first and last have tax implications.

In the case of an outright gift, if the parent dies within seven years of handing over the money the child may have to pay inheritance tax. Likewise, the parent may have to pay capital gains tax if the money is lent with interest and the value of the property increases.

If a parent is lending rather than giving money, Marsh said it was vital to get that established in a formal legal document to prevent confusion and distress if circumstances changed. Problems could arise if a parent died and the surviving spouse needed the money back to live on or to pass to other children to meet the terms of the dead parent's will, or the marriage or relationship of the child broke down.

Marsh cited the sad example of one former client who lent his son £150,000 to buy a home with his new wife, who he had only been dating for a few months before their marriage. The son was killed just five weeks after getting married and had not yet drawn up a will. The money automatically passed on to his spouse, despite the fact the parents and son had intended it as a loan.

"The document doesn't have to be complicated. It can be a very clear and simple statement of effect, so long as it is signed by all the parties," said Marsh.

The document needs to contain details about the basis on which the loan has been made, what will happen to the money if one of the parties dies, or the child and spouse or partner split up, or if the parent needs the money back.

The situation is simpler if a parent is lending to a single child. "However, it still needs to be documented because circumstances can change, people can fall out," said Marsh.

Likewise, people who are marrying should do the same if they are entering the relationship with disproportionate amounts of money. Marsh said he has often seen rows over who owns what proportion of a property when one partner has been paying the mortgage and the other all the household bills. These cases can be sorted out in court, he said, "but the result will depend on the facts or the credibility of the witnesses".

He added: "It is much cheaper and less traumatic to sort it out at the outset with a legally valid document, rather than waiting and ending up in court."

Source: ' Guardian '

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