At the Land Registry your child would be listed as the owner of the property, they would be required to pay the standard level of Stamp Duty and would be responsible for paying the mortgage. Your involvement as a financier would be over.
You might want to formalise the gift through a Deed of Gift document; this serves as evidence that you gave the deposit funds as a gift, not a loan. In fact, if f your child is also using a mortgage to fund their purchase, their lender will insist that you do so.
Gifting the growth in equity
Alternatively, you could try gifting a property to a family member. In this instance you would buy the property in your name, and you would be the one to take out the mortgage. In this case you would be listed on the Land Registry as the owners of the property and you could put in place a Declaration of Trust gifting some or all of the equity to your child. The amount of equity may then increase if there is an increase in property values and/or a decrease in the mortgage debt.
Gifting property to a family member in this way can be very useful; for example, where perhaps your child does not earn sufficient funds to qualify for a mortgage. It would then be a personal arrangement between you and your child as to whether your child would effectively have a ‘joint mortgage with parents’ and contribute to the ongoing mortgage payments. Although, since your child was not part of the mortgage arrangement, the payments would be deemed to have come from you. With a Declaration of Trust in place showing that the increase in equity belongs to your child and not to you, your child would not lose out in this arrangement.
If you give your child equity, your name is on the Land Registry and the property cannot be sold unless you sign the sale documents. You therefore have more control.
However, you will have to pay higher Stamp Duty Land Tax if you already own a property.
Life is more complicated if your child is living with a partner who may or may not be buying the property with your child. We have solutions to these problems. Please click through to Cohabitation Agreements and Declarations of Trust.
Evidence of a gift as opposed to a loan
The gifts that you are giving to your child will be evaluated at the date of your death. There needs to be firm evidence that funds were gifts rather than loans otherwise it could be claimed that the sums should be repaid in full to your estate. If your gift is a cash gift you will need to sign a Deed of Gift evidencing this fact. If it is a gift of equity then the Declaration of Trust will suffice.
Many banks and building societies require the buyer to provide this written proof that the deposit has been gifted and is non-refundable and unconditional – they need to know that they can repossess the property in an uncomplicated way in the event that the borrower is unable to meet their repayments. If all of the above is in order, most lenders will be happy to accept gifted deposits as long as they are outright gifts and no other party has an interest in the property.
Be aware that lenders are likely to require all of the following information:
- Full details of all gifted deposits, including whether they have been provided by non-family members (these are less likely to be accepted)
- Whether the donors are UK residents and whether their funds are held in a UK bank or building society
- Whether the gifted funds are going towards a buy-to-let property
- A full explanation of how the balance of the purchase price will be met, typically from salary
As a gift, your contribution comes under the category of Potentially Exempt Transfers or PETs for short. These gifts may be subject to Inheritance Tax if you were to die within seven years of making the gift. You can find out more about PETs here.
Amending your Will in order to reflect the gifts
You may wish to equalise your estate amongst your children, taking into account any lifetime gifts that have been made. We have a specific clause that can be added to your Will which is commonly called a “hotchpotch” clause. This gives an equal share to all of your children adding in previous lifetime gifts so that, on death, unequal amounts of residue are paid to individual children, in essence, equalising your estate.
Legal advice for buying a house with the help of parents
Buying a house with parents’ money raises many questions. Whether you are looking to buy with a family loan, to gift property to a family member, to take a joint mortgage with parents or to embark upon some other kind of ‘Bank of Mum and Dad’ transaction, the property lawyers at Wellers can help you explore all your options.
We have offices in London and the Southeast but can help you wherever you are. Call today or fill out an online enquiry form for more information.