It can be quite common for people to provide financial assistance to their adult children (or grandchildren); particularly when they are in their 20s or early 30s, and particularly in relation to helping children onto the property ladder by helping to purchase their first property.
Such financial assistance can come in the form of either a gift or a loan. Sometimes it can even be through the parents becoming a joint purchaser of the property. It is important to appreciate that there can be differences between these options, especially where tax is concerned, and that is the focus of this article.
Making a gift
Inheritance tax (IHT): No immediate IHT charge would arise on parents making an absolute gift to their adult child. However, if either parent was to die within seven years of the gift, an IHT charge might arise on the gifted money at that point. This is because the gift is essentially added to the value of the deceased parent’s estate, unless the gift happens to meet the conditions of certain IHT exemptions which exist.
Such gifted value would immediately form part of the adult child’s own estate (together with any future capital growth of the property).
Capital gains tax (CGT): If the gift is cash, then there would be no CGT consequences for the parents. However, in the unlikely event that other assets are gifted, then that might give rise to a CGT charge for the parents.
If the parents need to sell assets to first raise the cash, then that action could result in a CGT charge for them. But this would be the case regardless of which of these options that cash is then used.
To make it clear that the money is a gift – for example, in case HMRC or a mortgage lender were to seek proof that it is not a loan – it may be worth drawing up a deed of gift. Our solicitors here at Moore Barlow can assist you with this.
Making a loan
IHT: There would be no IHT consequences of loaning money. The value would remain part of the parents’ estates, and so if the loan is still outstanding when they die it will be included alongside the value of their other assets when calculating if any IHT is payable (particularly on second death).
No extra value would immediately be added to the adult child’s estate, due to the need to repay the loan; however, any future capital growth of the property would be part of their estate.
Income tax: If interest is charged on the loan, then that interest would be taxable income for the parents. However, interest is often not charged by parents, with the total repayable amount generally being the original loaned amount only. In that scenario, there would be no income tax (or CGT) consequences.
To make it clear that the money is a loan – for example, to protect the parents’ position or to set out the terms of the loan – it may be worth drawing up a loan agreement. Our solicitors here at Moore Barlow can assist you with this.
Jointly purchasing the property
IHT: The share of the property purchased by the parents would be part of their own estates. This means that it will be included alongside the value of their other assets when calculating if any IHT is payable on their deaths.
No extra value would be added to the adult child’s estate.
Stamp duty land tax (SDLT): In many circumstances the amount of SDLT payable on a property purchase will be greater where it is jointly purchased between parents and an adult child (as opposed to being solely purchased by the adult child).
CGT: There would be no CGT consequences of purchasing the property. But if the property was to later be sold, the total amount of CGT payable on the sale will often be greater where it is jointly owned between parents and an adult child (as opposed to being solely owned by the adult child).
A declaration of trust should always been draw up where property is jointly owned, to set out what percentage each party owns. Our solicitors here at Moore Barlow can assist you with this.
How Moore Barlow can help
The content of this article is a brief overview of the position and should not be considered as formal advice. If you would like formal advice, whether tax or legal, as tailored to your own position, please do not hesitate to get in touch with our Private Wealth team.