Parental guidance

Using the ‘bank of Mum and Dad’ may be the only way to get on to the property ladder for many but there are consequences. As well as considering inheritance and tax issues, clients must also ensure that the investment will be protected from claims, for example in the event of a relationship breakdown or problems with creditors.

Parents investing in property for a child under 18 have to use a trust structure (at least until the child turns 18) as under-18s can’t own property, which is fairly straightforward. However, it’s more complicated when the child is an adult.

An adult child can own property outright or benefit a trust, so parents need to think about which is appropriate. The purchase could be funded through a cash gift or loan and, if a loan, the parents must decide on what terms and whether a charge over the property should be taken. If the property will be jointly owned, should it be held as joint tenants or tenants in common? It’s a minefield.

I always ask clients what they want to achieve and what their concerns are. They often just want to keep things simple, in which case making an outright gift of cash is probably the most straightforward way of assisting the child with a property purchase. Provided the parent survives seven years from the date of the gift, the funds are outside the parent’s estate for inheritance tax (IHT) purposes.

The child owns the property outright so benefits from principal private residence (PPR) relief, provided the property has been used as their main residence. This ensures that there is no capital gains tax (CGT) payable on sale. Should the child go through a divorce or the breakdown of a cohabiting relationship, however, the property may be at risk of being sold to fund any settlement. Equally, if the child is made bankrupt, the property would be at risk of being claimed by creditors.

Grey cloud

Therefore, I advise clients to consider using a trust, funded with cash from the parents while the trustees (who could be the parents) buy the property. As beneficiary, the child can live in the property, which is protected from claims. Provided the parent survives the gift into trust by seven years, the funds are outside the parent’s estate for IHT purposes and PPR will
be available to relieve CGT when the trustees sell
the property.

Every silver lining has a cloud, though, and with trusts it is the accompanying tax complications. If the cash gift into trust exceeds the nil rate band (currently £325,000), there will be a tax charge on creation of the trust. Trusts are also subject to an ongoing charging regime that includes ten-yearly charges. With a trust comes the security of knowing that the funds are protected; the costs of running one, however, can make it unattractive.

For that reason, some clients opt to use a loan arrangement, particularly if asset protection is more important to them than IHT planning. The terms of the loan can be tailored to the circumstances. It may be on full commercial terms with a rate of interest linked to RPI and secured against the property.

Alternatively, the loan could be very simple.
For example, interest-free and repayable on its sale. The arrangement does not provide any immediate
IHT benefit as the loan remains an asset in the
parent’s estate.

The loan can be written off at a later date, though, when the parent is satisfied that the child is in a secure relationship or that there is no risk from creditors,
and the seven years for IHT purposes will then start to run. So there is still scope for IHT planning with this route.

Caroline Cook is a senior associate at Wedlake Bell