The Bank of Mum and Dad
It's a good time to sell. Demand for properties amongst buyers is currently exceeding supply meaning properties in the South East are selling quickly and often at, or even above, asking price. The availability of lending to First Time Buyers (FTBs) continues to improve and with lenders offering FTBs incentives such as paying their Stamp Duty Land Tax bill, more young people will be enticed to take their first step onto the property ladder. With the recent news that the government's Help to Buy scheme for new homes will be extended until 2020 it seems demand, and therefore prices, will continue to rise.
Whilst this is good news for sellers, it will not make things any easier for FTBs. Lenders may have relaxed their requirements in terms of deposits and are more willing to offer higher loan to value products than in recent years but interest rates remain at a record breaking low and pay rises lag behind the rate of inflation. Therefore, FTBs are still finding it difficult to accumulate sufficient deposits to fund the purchase of their first home.
The inevitable outcome is that more and more parents will contribute towards their children's purchase funds. Lenders, although becoming more relaxed in their approach to dealings with the ‘Bank of Mum and Dad’, require additional reassurance that their security cannot be compromised in the event of repossession and there are wide reaching implications that parents need to consider at the outset:
- The tax implications of the contribution (Capital Gains, Inheritance and Income Tax)
- Whether the contribution is to be treated as a loan or a gift.
- The additional requirements of the mortgage lender.
- What would happen to the contribution if the parent(s) die.
- What would happen to the contribution if the child dies.
- How the contribution could be affected by marriage or separation.
The importance of instructing a good quality, multi-discipline firm of solicitors to handle these transactions has never been greater. Instructing an accredited Conveyancing Quality Scheme firm such as Downs will ensure that the efficacy of the conveyancing process is not compromised by the additional complications and lender requirements. It will also mean that the wider implications of the arrangements are considered and full advice provided.
With our full range of legal services we are able to deal with matters that are ancillary to the ultimate goal of acquiring property:
- Our Commercial Property Department can deal with lease extensions and freehold management solutions in the case of leasehold property such as flats and maisonettes.
- Our Family Department can advise parents how best to protect their investment against a third party where their child is buying jointly with a partner or friend.
- Our Private Client Department can offer advice on the tax implications of the arrangements and prepare or update Wills to ensure that the investment is protected in the event of death.
Whilst transferring property from one party to another may seem like a relatively straightforward process, advice on the wider ramifications of more complicated transactions can be overlooked. It may be tempting to try and cut corners by instructing low cost conveyancing companies but specialist advice should always be sought. Failure to understand and deal with the wider ramifications of these types of transactions is simply storing up trouble and could potentially jeopardise the purchase, a future sale and the financial security of the Bank of Mum and Dad.
Whilst cheap conveyancing might seem like a good way to keep costs down, such savings pale into insignificance given the size of the investments being made and the possible consequences of getting it wrong. There are more benefits to be gained from instructing an accredited, multi-disciplined law firm to ensure all the bases are covered.
If you require any advice on the above issues, please contact Richard Cunningham on 01306 502302 or by email email@example.com.