Bank of Mum and Dad Lending Issues
Tthe 'bank of Mum and Dad' is unsurprisingly one of the leading sources of finance for house purchase – it was estimated that 317,000 mortgages were undertaken with parental assistance in 2018. The survey, sponsored by the Centre for Economics and Business Research and Legal & General, revealed that parents now provide finance for a quarter of UK property purchases with an average contribution of £18,000.
Assisting children to get a foot on the property ladder can have a number of consequences, both in legal and tax terms, depending on how the finance is provided. Here are just a few of the potential issues.
If finance is provided by way of a loan and interest is charged, that is potentially taxable to Income Tax. If the loan is made on the basis of 'taking a share' in the property and it is then sold at a profit, Capital Gains Tax may be payable. Where a loan is made and not repaid, it will remain in the lender's estate for Inheritance Tax purposes.
If the property is being bought with the aid of mortgage finance, it is normal for any private loan to rank behind the commercial lender in terms of repayment, so if the property were sold for less than the outstanding mortgage, the parental loan would not be able to be repaid from the sale proceeds.
Where the loan is made to a couple, there is the chance that, if the relationship breaks up, repayment may be in jeopardy.
Where there is no formal documentation (or inadequate documentation) of the nature and terms of the advance, there are also risks that a dispute may arise over the precise details of the agreement.