Mr and Mrs A have lived in Harlow in Essex for over 35 years. Now in their late 60s, they have paid off their mortgage and have substantial savings. They have 1 adult son who is aged 33 and has been renting a flat near the centre of Harlow whilst trying to save for a deposit on his first property.
With the rising property prices in Harlow and surrounding areas, their son has found it difficult to save sufficient funds to raise a deposit which is required by the mortgage lenders to purchase a property. Mr and Mrs A would like to help their son get onto the property ladder before property prices increase further locally and to stop him further reducing his savings on his rent.
The Gift
Mr and Mrs A attended our office to seek advice regarding the gift and we also advised that they spoke with a financial advisor. As a result, the clients decided to make a cash gift of £80,000 to their son. The funds were transferred directly into our client account to be used exclusively as part of the deposit for their son’s purchase of his first home.
As part of the mortgage application, it is important that the monies provided for the deposit are clearly stated as a gift and not a loan. We therefore prepared a Deed of Gift of deposit, clearly confirming the following:
- The funds were an outright gift
- The date of the gift
- No repayment was expected
- No legal charge or interest could be secured over the property
Tax Considerations
We advised Mr and Mrs A that because the gift exceeded the annual gifting allowance of £3000, the gift would be treated as a potentially exempt transfer (PET). We explained to the client the nature of a PET as follows:
- If they both survive for 7 years after making the gift the value of the gift will fall outside of their Estate for inheritance tax purposes
- If either of them dies within 7 years and their Estate exceeds the inheritance tax threshold, the gift may be counted as part of their Estate and could be subject to inheritance tax taper relief.
The Outcome
After seeking professional advice and with the gift securely in place, the clients’ son was able to take the following steps:
- Put down a 30% deposit on a house in Harlow.
- Secure a competitive mortgage rate.
- Move into his new home with 3 months.
Mr and Mrs A were incredibly grateful for this advice and hugely relieved that their son was able to be settled and move into his new property. The clients felt like the gift was a practical way to use their savings now so that they could enjoy seeing their son enjoy this money during their lifetime.
Reflections
The above illustrates how the bank of Mum and Dad pays such a crucial role in helping young people purchase their first time home. It also highlights the importance of seeking the appropriate financial and legal advice as well as the importance of:
- Documenting the gift and distinguishing it from a loan.
- Seeking advice in connection with inheritance tax planning.
- Seeking both financial and legal professional advice to ensure that both parents and child understand financial and legal implications.
If you would like advice on making a gift and the potential tax implications of doing so please don’t hesitate to contact our Wills & Probate team on 01279 295047 for an initial discussion, as we would be delighted to help.