Research by the Social Mobility Commission has found that just over a third of British home buyers depend on backing from their families, either in the form of a loan or gift to make their first property purchase. This analysis, which echos a similar Bank of Scotland survey assessing the Scottish situation, used information for the period 2013-14 and highlighted a significant jump from the 20% reliance recorded in 2010-11.
Home ownership among younger families was found to be 'in free fall' - just 31% of 25-29 year olds own their own properties, compared to some 63% in 1990 - highlighting not just a generational shift but also a trend which is fast becoming the norm. As children increasingly look to their parents, offering significant financial support - the current average sits at £17,500 - appropriate financial planning is a very real consideration for many UK families.
Defining the support
Responding to this growing pattern, it is important to consider the terms of any support given – chiefly, is the money a loan with conditions or a gift to help start off a new life as a homeowner?
Giving money outright as a gift can offer the child a boost of financial backing at a time when they most need it. While it can be tax effective, it is important that the parents are prepared to accept that, once given, they lose much of the influence over the funds. If the child decided to sell or, should they be in a long-term relationship, separate or divorce the investment will be either split or distributed in line with standing legal practice.
Agreements can be put in place and the indication from the Bank of Scotland survey is that parameters for repayment are increasingly under consideration. While a third of children questioned still indicated that they didn’t anticipate repaying their lender relative, this represents a significant drop (15%) between 2015 and 2016. As parents look to safeguard their own financial future, as well as that of their children, clear guidelines need to be put in place.
Should parents wish to maintain control over their investment, a number of options are open to them. Parental ownership could be considered. This helps the parents retain full control, but the practice of buying a property in their own name(s) and allowing a child to pay ‘rent’ to them can prove counter-productive for personal taxation.
Similar implications can arise from joint ownership, which through agreement can help to shape financial support as an investment, rather than a gift.
Alternatively, a more formal loan agreement could be the answer. This may be a simple document or one with additional clauses to cover future issues such as changes in a child’s relationship status.
Ultimately, there are a range of points to consider. Finance can become an emotive issue and it is important for both lender and borrower from the ‘Bank of Mum and Dad’ to have a clear and recorded understanding of the expectations around the support given. Here, much in the same way as an expert property lawyer is essential when making a purchase, effective legal planning is key to securing a clear and amicable future.
Berwins' expert team supports individuals and families to make appropriate and sustainable plans for the future.