March 2019 Newsletter
Helping children buy property: a property finder’s observations.
Following our participation in Charles Stanley’s current inherited wealth campaign, we are pleased to share with you a recent article we contributed, outlining some of the issues facing property buyers.
For parents who have a child heading off to university, we find that they like the certainty of knowing where their children are going to live whilst studying, they typically want the peace of mind that comes with knowing that they will be living in a safe area, within a secure block. At the same time, they do not want to have to deal with potentially difficult landlords year after year. For these reasons parents may consider buying rather than renting a property for their children to live in. In these circumstances, given the relatively short time frames involved (often 3-5 years), parents frequently decide that it is just too complicated to do anything other than buy the property outright, in their own name.
Similarly, we regularly come across situations where children are moving to London to study or work and younger siblings may also follow suit in subsequent years. This purchase will be a more medium to long term investment, where parents decide to buy a “family” home, a property which parents see several members of the family using over a number of years. This can include the parents themselves who may use the property for weekend breaks or on weekdays when they need to stay over for work. The usage varies from year to year and is unpredictable, again in these situations parents often decide to keep the property in their own name. It is simpler that putting it in joint names and avoids potential future problems when one of the children wants to sell the property, for example to fund their next purchase. If you do go down the joint ownership route, sensible planning and transparency at the outset goes a long way to avoid difficult situations in the future.
In addition, parents often feel that it is too big a risk to effectively hand over a large amount of capital to a child in their early twenties. We have seen instances where at a later date unsuitable partners have moved into the property or children have decided to sell the property to use some of the proceeds to fund a post university gap year!
It is also important to consider your own finances. Merryn Somerset Webb recently argued in the Financial Times that it may well make more sense to keep the cash for your own retirement plan. Handing over a large chunk of wealth, especially when you have not reached retirement age, can have a large impact on the future value of your pension pot. From a cashflow point of view it may make more sense to fund the rent of your child’s accommodation ensuring that you don’t compromise your own future financial security. If you do decide to buy a property for your children in your own name there is nothing to stop you putting the property into your children’s name at a later date, when the family dynamics become clearer and your children are older and wiser. However it is important to remember that a future transfer of ownership will potentially trigger a capital gains tax liability and/or a stamp duty liability.
These additional taxes can lead parents to take a leap of faith and put a property into their children’s name from Day 1. As children will be unlikely to already have a property in their own name, they will pay 3% less in stamp duty. We recently acted for clients who bought their London pied-a-terre in their eldest daughter’s name, saving them £41,000 in stamp duty on their £1.375m purchase.
Additionally, Inheritance Tax can also be avoided by putting the property in your child’s name. Inheritance Tax only becomes payable if the donor (parent) dies within 7 years of the gift being made.
With regards to financing, there is a halfway house whereby a family purchase is funded by both parents and children. In the last couple of months we have had two clients put down the deposit on a purchase for their children. In both cases the children were in their late 20s/early 30s and in long term relationships. Given the high prices of London properties, we often find that young professionals do not have sufficient savings for a deposit of a property purchase. Given that many of the more favourable mortgage deals require a 20-30% deposit this can run into hundreds of thousands of pounds. One set of parents did not actually have spare cash but rather we helped them arrange an equity release scheme on their own home.
Whichever route you chose to go down the fun starts when you start looking at our short list of properties. We always like to speak to all the parties that will be involved in the decision making process at the outset of the search. We like to make sure that everyone has the chance to list their requirements and we encourage all parties to come out on the initial day of viewings, the more the merrier! Parents always like the idea of having us on board as level headed, objective advisors who can diffuse any potential family disputes and make sure than a wise investment decision is made. We are used to finding properties that meet a wide range of criteria. We often successfully navigate the requests of a child wanting to buy a trendy Hackney new build versus the parents’ desire to buy a better value property in a more established part of town.
However, the reality is that parents do vary greatly in the amount of input they give to the purchase decision. Some are very hands off, merely stating a budget and the fact that they want a wise investment decision. Other parents actually buy a property without any input from their children. Often it is somewhere in between, we recently helped a client buy properties for both her sons who were similar in age. For one son the parents didn’t view any of the properties and merely provided the budget constraints, for the second son they visited all the properties their son was interested in. This very much reflected the different relationships they had with each boy.
As a final thought, whilst we worry about our children getting onto the property ladder we can live in hope – we had a recent case where our clients bought a house for their elderly parents! They wanted to move them into London so they were close by and easier to keep an eye on. Now there’s a comforting thought.
This article is not personal advice based on your circumstances. No news or research item is a personal recommendation and should not be used as the basis for making any investment or other financial decisions. Charles Stanley is a trading name of Charles Stanley and Co. Limited, which is authorised and regulated by the Financial Conduct Authority.
We very much hope that you find this update concise and informative. However please do let us know if you would rather we did not send this to you.