We are looking to help our two grown-up daughters buy their first homes, but if they marry, how could we ensure that none of the money we give them goes to a husband should relationship fail?
We are looking to help our two grown-up daughters buy their first homes in the next couple of years.
Neither of them is in a relationship at the moment, but if they did marry, how could we ensure that none of the money we give them goes to a husband should their relationship subsequently fail?
We have heard of putting a ‘charge’ on a contract when buying a house. What are the finer details of doing this? M.S., Taunton, Somerset
Forward planning: how could we ensure that none of the money we give them goes to a husband should their relationship subsequently fail?
Ruth Jackson-Kirby replies: With house prices rising by around 65 per cent over the past ten years, that first rung on the property ladder has become ever harder to reach.
The average first-time buyer now needs a £75,000 deposit, according to online property website Rightmove. As a result, the Bank of Mum and Dad has become increasingly important for first-time buyers. So, your problem isn’t uncommon. However, there isn’t a simple answer I’m afraid to the question you raise.
In order to put a charge on the property you would need the money to be a loan rather than a gift. It could then be noted down as a second charge meaning that when the property is sold, the mortgage lender gets repaid first, then you. However, this could cause your daughters some problems.
Lenders want to know where the deposit for a property has come from. If it includes cash from parents, they will ask if it is a gift or a loan. If the answer is a loan, it could limit your daughters’ mortgage options.
As David Hollingworth, of mortgage broker L&C, says: ‘Many lenders will be uncomfortable with the use of a loan.’
Any mortgage lender which does accept the loan as part of the deposit will assume it requires regular repayments and these will be included in their affordability calculations. Both these factors could curtail your daughters’ ability to get mortgages.
Another consideration if you opt to loan the money is inheritance tax (IHT). Philip Rutter, a partner at law firm Bishop & Sewell, says: ‘If the payment is a gift, then it does not attract IHT on the donor’s death, so long as they survive for seven years from the date of the gift.
‘If it is a loan, then it will be repayable on the donor’s death if it is not repaid before then – and will then form part of the donor’s estate for IHT purposes and potentially be taxable at 40 per cent.’
If you gift the money, another option to protect it is a prenuptial agreement between your daughters and their future spouses. Rutter says the agreement could ‘ringfence any gift and protect it from any claim in the event of a divorce’.
He adds: ‘While prenuptial agreements are not legally binding contracts under English law, they will be upheld in nearly all cases as long as certain criteria are met, one of them being that they do not produce an outcome that is significantly unfair.
‘The problem is that you cannot make your daughters enter into an agreement and even if they are willing to do so, their future spouses may not be.’
What option best suits will come down to how much money you are wanting to give your daughters. If it is a fairly small percentage of the purchase price, then it may not be economic to spend too much time and money worrying about protecting the payment.
But if it is going to be a significant percentage of the purchase price then it is worth taking legal advice on asset protection. An altogether simpler option may be to not give your daughters the money in the first place. You can still use your savings to help them buy property, but you keep the money in your name.
Hollingworth says: ‘Some first-time buyer loans allow parents to put cash in a separate savings account in their own name. This can allow a higher loan-to-value (LTV) mortgage to be taken by the first-time buyer – the savings act as additional security.
‘The cash remains in the parent’s name rather than being gifted although there will be requirements about when the cash is released.’
One such plan is Barclays’ Family Springboard mortgage. This offers a five-year, fixed rate at 4.2 per cent for a 95 per cent loan-to-value – or 4.25 per cent for 100 per cent with no fee.
You, the parent, would put 10 per cent of the purchase price in a Barclays savings account linked to the mortgage. As long as all the repayments are made on the mortgage you would then get your money back after five years. The linked savings account currently pays 3.25 per cent interest.