Special mortgages, inheritance tax rule changes and repayable deposits are some of the tools parents and other close family members could use to help the next generation buy a home.
As less and less young people are getting onto the property ladder, many parents and grandparents want to give their children and grandchildren a financial leg-up but are restricted from doing so due to a variety of tax issues. However, there are legitimate ways of bypassing these pitfalls to enable the younger generation to tap into the Bank of Mum and Dad…
Joint borrower sole proprietor mortgages
With the stamp duty surcharge for second-homeowners adding an extra 3% to the cost of buying more than one property, parents are unable to buy jointly with their children without incurring the extra charge, as well as the fact that the sale of such a property could be subject to capital gains tax for the parents. This has been further heightened by the changes brought in in November, with first-time buyers now eligible for a stamp duty exemption on properties up to £300,000 – but parents hoping to buy with a child would invalidate this tax break if they already own, or have owned, a property.
This has led to a surge in enquiries for joint borrower sole proprietor (JBSP) mortgages, according to a number of brokers and lenders. This product allows close family members to financially back a buyer without co-owning the property, which avoids many of the pitfalls mentioned above. It is currently only offered by a few lenders, such as Barclays, Metro Bank and CYBG, and the lack of competition could mean interest rates on such products are pushed higher. However, it is still a popular way for families to help out their offspring without adding their name to the deeds, with all the complications and extra expenses this entails.
Multiple generation mortgages
Barclays offers a relatively unique mortgage option allowing first-time buyers with no deposit saved up to get a 100% mortgage. Instead, a close relative or loved one provides 10% of the property’s price as a security deposit, which gets put into a special account, the Helpful Start account, and held there for three years. Provided the borrower makes all the mortgage payments on time, the full deposit amount is paid back after the three-year period with interest – although if any payments are missed, the bank could hold onto some of that cash. The relative or loved one is not classed as a guarantor, just a ‘helper’ with the necessary funds. It is only eligible on non-new-build properties in the UK worth up to £500,000.
St James’s Place and Metro Bank also offers an intergenerational mortgage range, which allows parents and grandparents to give their child or grandchild extra help when buying a home – again while avoiding actually being named on the deeds and incurring extra taxes. Family members can either add a cash gift to top up the deposit, apply for a secured deposit account to increase the borrowing security, or make a joint mortgage application. Unlike the Barclays product, the relative doesn’t accrue interest on the money they put in.
Inheritance tax changes
Chancellor Philip Hammond has just announced he will be reviewing the complicated rules around inheritance tax, as it was revealed last year that the amount being paid by Brits had reached its highest ever level of £5.3bn. Current gifting rules mean that only £3,000 a year, or £6,000 for married couples, can be given away without being subject to the tax. Any amount more than this at present could incur a fee of up to 40% if the giver dies within seven years of making the gift, and if their entire estate is worth more than £850,000 for a married couple. The Treasury has confirmed that both the timescale and the threshold for gifts could be reassessed, and a reform could mean that the older generation will be able to help out their children and grandchildren to a significantly higher degree towards purchasing property.