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The Bank of Mum and Dad (BoMAD)  is now busier than ever, helping young home buyers get onto the property ladder. The Bank of Mum and Dad is one of the UK's top ten main mortgage lenders, the 9^th biggest lender, it lends more than Yorkshire Building Society  and the Co Operative bank!

It's now relatively common for young people, and predominantly first time buyers, to receive a contribution from parents to help with putting a deposit down when purchasing a home but what does this actually mean?

Home owning is still important in the UK – 77% of people who don’t own their own home would like to and for over two thirds of these people saving for a deposit is the prohibiting factor. Legal and General published a survey in 2020 stating that 49% of first time buyers enlisted  BoMAD as the only possible solution.

So…if you have arranged for your parents to make a contribution financially when it comes to purchasing your home, then there is a set practise to follow to mark the money as officially ‘gifted’ when using the Bank of Mum and Dad.  The average loan size is £20,000.

What does gifting money entail?

To put it simply, gifting money means that the money is a gift and consequently you won’t have to pay it back, unlike being loaned money. Usually, all that would be required is a letter written by your parents stating the amount they are gifting you and that they do not wish for it to be paid back. Some banks will require evidence that your parents haven’t taken out a loan to provide the deposit to ensure that if they defaulted on that loan that  they don’t have any ownership entitlement to the property you’re buying and therefore  your home wouldn’t be at risk.

What tax implications are there in gifting or receiving money?

You won’t have to pay any immediate tax on money gifted from BoMad, your  parents  won’t have to pay any tax on the gift either.

There is a possibility that in the future inheritance tax may be due. We’re all individually allowed to give as much as £3,000 a year away which is immediately exempt from inheritance tax. You’re also allowed to carry over any unused allowance but only from the previous year. This means two parents could gift their child £12,000 without inheritance tax being a problem if they hadn’t gifted any other money to anyone in the previous two years.

Once the £12,000 has been reached – or for some other reason if either of your parents , or the gifter, don’t have their full annual inheritance tax allowance to play with – then the money could be liable for inheritance tax.

If the person gifting the money was to die within seven years it would still be classed as part of their estate for inheritance tax purposes. This means if their total estate, including the gift, is worth more than £325,000 then up to 40% tax would be due on the excess.

The amount of tax due on the gift decreases as the seven years elapse.

So if your parents had gifted you £12,000 and they passed away within 3 years you would have an immediate tax bill of £4,800. If your parents loan you the money but expect it to be paid back at some point in the future, then there is a different procedure to follow.

Can parents protect a housw deposit gift?

If you are receiving money from your parents for a deposit and you are buying with your partner or friend, your parents may want to protect the cash they’ve gifted  in the event you split up with a declaration of trust, or deed of trust.

The solicitor working on the property purchase can draw up a declaration of trust. This states who the money was gifted to – so your parents can specify it was a gift to you and not your partner. If the you break up this document will ensure you retain ownership of your parents financial gift. It can also clarify if the money is a gift or a loan, and if the latter when it needs to be paid back.

When you’re buying the property as partners or friends you can also use a deed of trust to lay out responsibilities for outgoings and what happens to the property if the relationship breaks down.

Bear in mind though, that if you go on to marry the person you bought the property with this could affect the deed of trust.

What does loaning money entail?

If you parents want to loan you a sum of money a plan of repayment is essential.

This means a plan to pay a reasonable amount to be repaid but wouldn’t be a problem on top of the mortgage and other outgoings. In addition in the plan, confirming factors such as how often these payments will/can be made; monthly, yearly, or as and when they can afford it. In addition, if after a certain period of time, you would be prepared to write this loan off if their circumstances change or you feel that they have shown enough commitment to the loan by making regular payments to you. This way of helping can be a good compromise as they get to fund their life, and you know you’ll get back your money at some point – it’s a win-win situation.

What about a Guarantor mortgage?

A guarantor mortgage could also be an option for you if you are considering using The Bank of Mum and Dad. So… you might be wondering what this entails?

 A guarantor mortgage is where either parent/close relative acts a guarantor on your mortgage. This is very often appealing to first-time buyers as the guarantor’s name will be taken into account when it comes to working out how much the borrower can afford to borrow.

This essentially means that you could be able to borrow more than you could if you were applying by yourself. However, a vital fact to take into account when choosing a guarantor mortgage is that if for some reason you weren’t able to make your repayment, the guarantor would be required to cover them for you.

Buy a property with your parent

You could take out a joint mortgage joint mortgage with your parents, making you both equally liable for the repayment of the loan. The upside is that with your combined incomes, you may be able to afford to take on a larger loan.

The big drawback to this plan is the additional stamp duty rate. If your parents already own a property, then your  new home would count as a second home. This means there would be an additional 3% stamp duty due, which could make the property significantly more expensive.

Plus if it is a second home and you are still on the mortgage when the property is sold, there may be capital gains tax (CGT) liabilities. Some lenders will let you take on a joint mortgage, but your name doesn’t have to be added to the property’s title deeds, allowing you to side step these tax problems.

As Mortgage Brokers in Liverpool, Wirral and Southport, we offer free advice and will look at everything from your credit history, income, outgoings and future plans to see deals to match your situation and help you decide which way works best for you when using The Bank of Mum and Dad.

Call the Right Click Finance team today on 0151 734 6777 to speak to a Mortgage Broker.