For many younger people these days, getting on the property ladder can be a real challenge and, as interest rates climb, mortgages become even more expensive, and the average deposit required grows, it is only going to get more difficult. For this reason, many first time buyers are turning to their parents for help. But buying property for children can be complex, with many tax issues to consider. So, if you have found yourself asking, ‘can you put a property in your child’s name?’, here for you is a closer look at your options.
Buying a property in a child’s name
Buying and putting property in a child’s name may sound like a good option, providing somewhere for them to live, helping them save money and making an investment in their future.
However, it is vital that steps are taken to minimise the amount of fees and taxes payable when you first buy the property and then later, when the times comes for them to inherit, that you have done whatever is possible to reduce the amount of Inheritance Tax that they will have to pay.
If you buy a property for your child to live in with the intention that they will legally own it in the future, you will have to consider that it will be a second property for you, which means you will have to pay Stamp Duty Land Tax on the purchase at 3 per cent above the standard rate.
If you elect to gift the property to your child before you die, Inheritance Tax rules will apply. If you survive for seven years or more after the gift is made, no Inheritance Tax will be payable. However, if you die sooner, a sliding scale of tax will apply. Capital Gains Tax will also be payable on the gifting, so it may be that you’ll be liable for both taxes.
You’ll also need to go through the conveyancing process on transferring the property to your child. This adds even more to the costs of buying and putting property in a child’s name.
You may therefore find it more straightforward, and cheaper, to gift your child money to help them buy their own house, rather than buying one for them yourself and putting property in your child’s name.
Gifting your children money to buy their own property
Even if your child can just about afford to buy their own property, gifting them some money means they may be in a position to buy something more suitable, or qualify for a cheaper mortgage deal. With a higher deposit available, lenders may be more willing to accept a borrower, or may offer lower interest rates.
Most banks will accept a deposit provided by parents, but you may need to provide a written statement confirming that it is a gift rather than a loan. This is because they will want to factor in any loan repayments in their affordability check, as well as making sure that, if they had to repossess the property, you wouldn’t be coming forward to claim a stake in it.
Some banks limit the amount of money that you are able to gift. For example, some lenders insist that at least 75 per cent of the deposit comes from the buyer’s own funds.
Whilst there are no immediate tax implications for gifting money, you will need to consider Inheritance Tax.
You are permitted to give away £3,000 every year tax free, and you can carry over any unused allowance from the previous year. This means that you can give your child £6,000 from one parent, or £12,000 if the gifts come from both parents. This is assuming that you have not made any other financial gifts during that period.
If you survive for seven years after the gift is made, there will be no financial implications. Should you die sooner and your total estate is worth more than the current threshold, Inheritance Tax may be payable. There is a sliding scale, and the longer you survive after the gift, the lower the rate of Inheritance Tax.
Buying a property using a trust fund
The best way to transfer property into child’s name may be to make the purchase using a trust fund. This allows the child to live in the property rent free, as well as inherit it when you die. Depending on the type of trust used, you may also be able to avoid Capital Gains Tax and Inheritance Tax.
It may, however, be necessary to pay an immediate 20 per cent Inheritance Tax charge when setting up the trust, and there may also be a ten year anniversary charge at 6 per cent every ten years after.
Buying a property with a joint mortgage
An alternative to gifting money, or buying and putting property in a child’s name, is to take out a joint mortgage. This can work well in situations where a child is struggling to qualify for a mortgage based on their sole income.
However, with this method, the same conditions about owning a second home will apply. In other words, higher Stamp Duty Land Tax and a potential Capital Gains Tax liability when you give up your share. First time buyers qualify for lower Stamp Duty, but this would not apply if you are also on the property deeds. Some lenders may allow a mortgage without you going on the deeds, which could resolve any issues with tax.
You could also buy and keep the property in your own name and then pass it on to your child when you die, in which case only Inheritance Tax will apply.
Can I buy a property in my child’s name?
Whether you are gifting property or money to children, it is vital that you take independent advice on tax planning for families, so that you are fully informed of any pitfalls, and are armed with the knowledge you need to make the best decision based on your individual circumstances.
Here at Partridge Muir & Warren, we offer a dedicated Inheritance Tax planning service which involves formulating a personalised strategy for your family, so that assets can be protected and inheritance optimised between the generations.
From creating trusts to lifetime gifting, from property ownership strategies to residence allowance optimisation and charitable legacies, our highly experienced IHT planning specialists know just how to make best use of the tools available.
Please do not hesitate to get in touch should you wish to discuss your situation.