A guide to helping your child to buy a property and first-time buyer stamp duty relief.
Do you want to help your child buy a property, but also want them to benefit from first-time buyer’s Stamp Duty relief? We’ve pulled together what you need to know!
House prices have steadily risen over the years, especially in areas such as London. As a result, the bank of mum and dad is an increasingly popular and a necessary resource.
In 2017 Budget, the government announced a change in Stamp Duty for first-time buyers. The change means first-time buyers can save up to £5,000 on their Stamp Duty bill. Anyone buying a first home worth less than £300,000 will pay no stamp duty at all, while those buying homes worth up to £500,000 will get a partial relief. In order to benefit from first-time buyer’s Stamp Duty relief, you must never have owned a residential property in the UK or abroad before. You can see more details in our blog ‘the essential guide to stamp duty’.
Whilst great news for many first-time buyers, it does complicate the process for parents trying to help their child buy a property. Before you make the first steps to help your child buy a property, it is important that you understand the changes that have been made and how this may affect you and your child. In this article, we assume that the parent already owns a property and are not themselves a first-time buyer.
Increasingly, parents help their child buy their first home by giving them a contribution to their deposit. The new stamp-duty rules do not change that fact that you can gift your child a deposit. There is no current limit on how much tax-free money you can give your child in a year, as long as you ensure that it is in the form of a gift. However, if you pass away within seven years of this gift, your child may be subject to inheritance tax.
Generally, having a bigger deposit means you can access better mortgage deals. This is because the more money you put towards the house, the less of a risk you pose to the mortgage provider or lender. Lenders are unlikely to let you buy the property unless you have at least five per cent of the deposit.
Most mortgages are four per cent of the person’s salary, but it can be lower or higher depending on their credit rating and deposit amount.
One way in which a parent can help their child buy their first property is by taking out a joint mortgage. However, if you set up a joint mortgage, in most instances, the property will be in both you and your child’s name. This means you will be joint owners of the property and therefore your child will not be eligible for first-time buyer’s Stamp Duty relief. In fact, if this means you are buying a second property, the property might also fall under the second property Stamp Duty rules, meaning you need to pay an extra 3% of Stamp Duty.
There are however some ways in which you can help your child with a mortgage and they can still benefit from first-time buyer Stamp Duty relief.
One option is to look a guarantor mortgages. These can allow borrowers to take out larger loans than a lender would normally provide or a mortgage with a smaller deposit if a close family member is named on the mortgage as a guarantor. As the guarantor, you will not own a share of the property or be named on the title deeds, however, you will be legally responsible to make the repayments if the borrower falls behind. In order to become a guarantor, you would normally need to own your own property, have a good credit rating and have a high enough income to cover the repayments if the borrower fell behind. If you are considering becoming a guarantor on a mortgage, you need to be aware that if you were to decide to remortgage your current property, you would need to declare this and it could affect your credit rating and what re-mortgage rates are available.
There is another way to help your child with their mortgage and for them to benefit from first-time buyer Stamp Duty relief: the joint sole proprietor mortage. This allows you and your child to take out a joint mortgage so that there are two borrowers, but only one name will be listed as the sole owner of the property at the Land Registry. This means if your child can be listed as the sole owner and so they would still benefit from first-time buyer Stamp Duty relief. It is important to be aware that the co-buyer who is taking out a joint mortgage but whose name is not on the deeds will have no claim to any future profits or money from a sale.
Whilst this option might sound tempting, it is not right for all circumstances. Aside from the risk that one person is liable for a mortgage without any ownership of the property, only a limited number of companies offer this mortgage. This means you are unlikely to get the best mortgage rates available and will have few options to choose from.
The new changes to first-time buyer Stamp Duty relief do not affect the fact that you can gift your child a deposit to their property, however they make taking out a joint mortgage more challenging. There are a few options that allow you help your child with their mortgage so they can still benefit from first-time buyer Stamp Duty relief, however it means taking on significant financial risk and responsibility without any ownership of the property. Whilst these options might be right for some parents, we would recommend getting legal advice before proceeding with a guarantor or joint sole proprietor mortgage.
Are you helping your child buy their first property and if so, how are you going about it? We would love to hear your thoughts.