Giving the next generation the keys to their own front door
PUBLISHED: 11:23 31 October 2018
We are regularly reminded of the high cost of housing with statistics revealing that only one in three millennials will be able to afford their own home during their lifetime and that most will remain in the category known as Generation Rent
Parents and grandparents are often keen to provide a helping hand to enable the younger generation to get a foot on the property ladder. Given that, according to recent research, the average deposit required by first time buyers in the South East is an astonishing £52,000, this is something most twenty-or even thirtysomethings wont manage without considerable financial support.
Parents and grandparents with available capital to spare have a variety of options when it comes to providing the support needed but thought needs to be given as to how the help is structured and recorded so as to safeguard the funds from the various risks they may be exposed to.
A loan or a declaration of trust?
A loan to the first time buyer could be secured on the property title as a second charge to any mortgage being obtained and would provide a clear record of the sum lent and the basis on which it is to be repaid or released. However, the loan would be considered an asset of the estate of the parent or grandparent on death if it remained outstanding and it could therefore be subject to inheritance tax. If the parent or grandparent can afford to part with the sums required by the younger generation, alternative methods of protecting the funds should be considered.
A Declaration of Trust can be prepared setting out the amount of the gift to the younger generation and can record what is to happen to those funds on the sale or transfer of the property. The Declaration can also stipulate the way in which any equity in the property is to be held and is particularly useful when the member of the younger generation may be cohabiting with a partner or friend and there is concern over how long the living arrangement may last. This is also a useful method of recording unequal shares in a property whether held by the parent or grandparent with the member of the younger generation or simply between the younger generation and their co-habitee.
Stamp Duty Land Tax needs to be considered to ensure the additional 3% rate does not apply if parents and grandparents choose to co-own property with the younger generation and in order to maximise the relief that first time buyers can benefit from if the property is valued at under £300,000.
By engaging in clear communication with your child or grandchild to manage expectations and taking proper advice, it is possible to help the millennials in your family start on their own property journey.
Top tips - Before offering to assist your child or grandchild you should ask yourself the following questions:
• Can I afford to help? If so will I realistically need to have any of the funds back?
• How far do I want to protect or control the funds which I am contributing?
• Are there any other relationship issues to consider? For example; Am I being fair to other children or grandchildren? How will my child’s spouse/partner feel if I co-own the house they live in? Can my child/grandchild afford to run the property or am I going to need to contribute?