How Does Stamp Duty Land Tax Affect Parents Helping Their Children Onto The Property Ladder?

Year Published: 2017

It is becoming increasingly more difficult for first time buyers to purchase their own properties. Often the ‘bank of mum and dad’ is asked to help by providing funds for an initial deposit or acting as guarantor on a mortgage. However, whilst parents are usually happy to help where they can, there can be a reluctance to make outright gifts in case circumstances change in the future. In addition, there has been a recent change to the cost of Stamp Duty Land Tax, which needs to be taken into account.

Summarised below are the changes to Stamp Duty Land Tax and a list of the options available for parents with their advantages and disadvantages.

What is Stamp Duty Land Tax and what’s changed?

Vicky Timothy, Personal Law Solicitor at SAS Daniels, Stockport

Vicky Timothy, Associate Personal Law Solicitor

Stamp Duty Land Tax (SDLT) is the tax paid when a property is purchased. The law recently changed to increase the amount of tax a person pays when they own more than one property. This has affected purchases from 1 April 2016.

If the purchaser does not own any other properties, the normal rate of SDLT is due. This is currently payable in tranches, so that each step in value has a different tax rate.

If the purchaser owns an interest in another property, SDLT is charged at a higher rate of 3% in additional to the normal rate for each step in value. This is the case unless the purchaser is selling their main residence and purchasing the new residence within a three year window.

The rates:

SDLT is charged at X% of the property value, as shown below.

Value of Property Normal rate of SDLT, % Higher rate of SDLT, %
Up to £40,000 0 0
£40,000 – £125,000 0 3 (including the first £40,000)
£125,000 – £250,000 2 5
£250,000 – £925,000 5 8
£925,000 – £1.5 million 10 13
More than £1.5 million 12 15

If the property is owned jointly and one of the beneficiaries owns another property, the higher rate is payable on the whole purchase price. There are special rules for spouses which are a trap for the unwary, so it’s vital to make sure that specialist advice is taken.

What options are available to parents?

  • Outright gift:

Making an outright gift is the simplest way to help and the option favoured by mortgage companies.

SDLT will be payable at the rate of the purchaser, so if they do not have an interest in another property, there will be less SDLT to pay.

However, the gift may be subject to inheritance tax in the future and may also be vulnerable in the event of death, divorce or bankruptcy.

  • Purchasing together:

Parents can buy the property together with their children and a simple declaration of trust can be signed to set out each of their entitlements if the property is sold in the future.

The advantage of this approach is that parents have helped their children, but have not given anything away – they have simply invested funds in a property. The parents will benefit from any growth (although they may lose funds if the property decreases in value).

However, if the parents own their own property, SDLT will be charged at the higher rate on the value of the whole property, and not just on the value of their share. This will be an extra 3% of the purchase price.

When the property is sold, the parents will also pay Capital Gains Tax (CGT) on any growth in value. However, their children will be able to claim the main residence exemption, so that no CGT will be payable on their share.

  • Loan:

By making a loan to their child, parents do not make a gift for tax purposes. The loan should be formally documented to avoid any confusion in the future. It may also be sensible for a charge to be taken over the property to provide additional security.

The parents can decide the terms of the loan agreement as to whether they benefit from interest on a regular basis, or an increase in line with the value of the property and the repayment terms.

With this option, SDLT will be charged at the rate of the purchaser, so if they do not have an interest in another property, there will be less SDLT to pay.

The child ought to be able to claim main residence relief from Capital Gains Tax, so that no CGT is payable even if the property increases in value. This increase will be outside of the parents’ estate subject to the terms of the loan agreement.

The loan is better protected in the event of death, divorce or bankruptcy, although advice should be taken to provide the best protection.

This option may not be available in the event that a mortgage is required. However, this will depend upon the mortgage provider and should be checked before proceeding.

  • Guarantor:

In this case the parents may not pay any funds up front, but could be liable for mortgage repayments in the event the child can’t make a payment.

With this option, SDLT will be charged at the rate of the purchaser, so if they do not have an interest in another property, there will be less SDLT to pay.

There is a risk that funds may be required which the parents will ‘lose’ in the event of a default in payment.

When considering your options, specialist advice should be taken to discuss which of the options is best for your individual circumstances, in order to protect your assets for your family in the future.

For more information on Stamp Duty Land Tax and how you can help your children onto the property ladder, please contact Vicky Timothy on 0161 475 1209.

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