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It’s a fact that the high property prices in the UK are preventing first time buyers buy their first homes. Those same high prices are often meaning that their parents are often ‘equity rich’. The first time home buyers’ loss is their parents gain.

These days over a third of first time buyers are receiving help from their parents.

· Helping with a deposit
· Helping with the mortgage
· Making a gift
· Tax Implications
· Legal Implications

Helping with a deposit
A deposit is no longer mandatory when buying a first home due to the growing number of 100 per cent mortgages that are available to first-time buyers.

However, having at least five per cent to put down in capital will open doors to more lenders and better deals. It will also provide a buffer zone should property prices fall and therefore help avoid the possibility of finding yourself in negative equity (i.e. owing more on your mortgage than the value of your property).

It could also mean escaping a Higher Lending Charge – a fee levied by some lenders on mortgages of over 90 or 95 per cent Loan to Value (LTV).

With the average price of a UK home so high, a five per cent deposit currently amounts to a considerable amount. Whether your intention is to give or loan this money to your child, either for the deposit or to help with some of the costs, you will first need to raise it.

· Further Advance / Remortgaging: One way is to take a ‘further advance’ which means increasing your mortgage with your existing lender. An alternative is to remortgage with a new lender and you may wish to use the opportunity to obtain a better deal. Even if you have remortgaged or have taken a further advance in the past, house prices have gone up at such a rate it is likely you will still have equity to tap in to.

Remortgaging now accounts for around 40 per cent of all lending, says the Council of Mortgage Lenders, so the process is more straightforward than ever. However, it may not be worth remortgaging if you are tied into your mortgage and will have to pay redemption penalties to leave. You will also need to consider any costs involved in remortgaging as opposed to taking a further advance. If for any reason you are no longer receiving an income, it is unlikely you will be able to get a remortgage but an equity release scheme (see below) may be suitable.

· Selling your endowment policy/policies: Remember: Endowments are designed as to run their full term, they often involve reduced allocation rates in the early years and as such should be held for the full term in order to achieve maximum benefit. Early encashment will almost certainly mean an MVA will be applied and there will be a complete loss of any future participation in the life funds bonuses. There are potential implications surrounding income tax and loss of life cover involved in the early surrender or sale of a policy. The endowment is likely to be been used in conjunction with an existing mortgage and as such a suitable alternative would have to be arranged.

· Whether or not your endowment policy is on target to pay off your mortgage, you still have the choice of surrendering or selling the policy to raise funds. Surrendering the policy (or cashing it back in with your life insurer) can incur penalties, meaning you get less than its true worth. But if you sell it on to an investor through firms such as the Association of Policy Market Makers (APMM) it could save you around 20 per cent.

Bear in mind you will not be able to sell your policy if it is less than seven years old or worth under £1,500. It will take around two to three weeks before the funds are in your account.

· Equity release: This is a scheme that will theoretically deliver your child’s inheritance early. The most popular type of equity release is a lifetime mortgage. This is when you take out a loan against a certain percentage of your property (up to 50 per cent depending on your age), which you can choose to receive as a lump sum.

The interest on the loan – which is usually fixed and at a higher rate than on a standard mortgage – accumulates over your lifetime. No repayments are due when you are alive. Instead the loan is repaid on your death after which time the house must be sold, typically within a year. All schemes regulated by industry body, SHIP (Safe Home Income Plans which can be found at www.ship-ltd.org), carry a no negative equity guarantee i.e. you will never owe more than the value of your home.

However, even if you took a lifetime mortgage on just 25 per cent of your home, this still means that your beneficiaries could be left with nothing if you go on to live a long time.

Variations to the above scheme are available which allow you to make regular interest only payments on the liability, thereby potentially negating the negative impact of compound interest accumulation.

The other form of equity release, home reversion plans, involve selling a proportion of your property to a finance provider, usually at a discount to the market value. Upon death or sale of the property the finance provider takes a proportionate sum representing their percentage share of the property. However, they are not as popular as lifetime mortgages due to current low interest rates. If considering a lifetime mortgage as a method of raising capital it is important to note that they are not appropriate for everyone and will not be suitable in all situations. Should you be contemplating equity release you should consider discussing it with potential estate beneficiaries and also check any impact on state benefit entitlement.

· Using your savings: You could use your savings for your child’s deposit but – depending on the type of account in which they are held – there could be repercussions. For example, some regular savings accounts only offer a preferred rate of interest or a bonus on the condition that a limited number of withdrawals – or none at all – are made within a given time frame.

Notice accounts can require anything from seven to 120 days’ notice if you want to make a withdrawal without paying a penalty. Most notice periods however are between 30 and 60 days. Bonds or ‘Term’ accounts do not often allow any withdrawals before the maturity date which is typically set between one and five years. If a withdrawal is permitted, it is likely to come with a heavy penalty.

· Getting cash out of your pension: If you have a personal pension fund you can take 25 per cent of it as a tax-free cash lump sum. Currently, the remaining 75 per cent must be used to buy an annuity and you have to be aged between 50 and 75 to withdraw cash from your fund regardless of whether you are retired or working.

It is important to note that accessing pension benefits prematurely is not suitable for most people and will reduce your retirement income. Any income received from a pension is taxable and may result in you paying a higher marginal rate of tax. Should you wish advice in this area you should consult a pension specialist.

· Mortgaging an overseas property: If you have a property that you bought for cash overseas, it is possible to release some funds by taking a mortgage against it. You will not be able to raise funds with a UK bank or building society, as they will only lend on properties within the country.

If you feel more comfortable using a familiar lender, there are overseas divisions of some UK banks – Halifax operates in Spain for example under Banco Halifax Hispania – but they will still be governed by the same laws and regulations of the country in question.
Remortgaging your overseas home may cost between two and three per cent of the property, depending on the country, in notary and legal fees. The amount of mortgage you may be able to raise on a home abroad will typically amount to between 70 and 85 per cent of its valuation, although this will also depend on the country.

If you are bringing money into the UK you will need to consider the exchange rate, transfer service and any potential tax implications attached remitting funds back to the UK.

Giving them money: If you want to make a gift of a deposit to your child you are able to do so, at any amount, tax-free. However, under current Inheritance Tax laws, if the amount you give exceeds £3,000 in any one year, you will have to live a further seven years for the excess amount to be completely discounted from your estate when you die.

If you die within seven years, Inheritance Tax will be payable on the excess sum over £3000. Additionally, if you have not already done so, it is possible to utilise your previous tax years gifting allowance thereby gifting £6000 free from inheritance tax.

Lending them money: On whatever basis you want to lend to your child it is a good idea to set down a repayment schedule from the start. If you prefer, this can be made legally binding with a ‘promissory note’ available from a solicitor.
 
Many parents will help their child by providing an interest-free loan. Alternatively, you could charge a token rate of interest – perhaps amounting to that which you have lost by withdrawing the funds from your savings account. If you want to set an example by charging marginal interest on the loan, you could set this in accordance with the Bank of England base rate, which is reviewed every month. If you elect to charge your child interest on the loan then you should also consider any potential tax implications associated with this income.

Alternatively, you could reflect your contribution by means of a ‘declaration of trust’ – otherwise known as ‘deed of trust’. This is a private legal document separate from, but running alongside, the property deeds. Its purpose is to make any arrangement you have drawn up with your child legally binding. For example, if your contribution for the deposit was £8,000 the declaration of trust could state that you will reclaim £8,000 on sale of the house. Or you could use the document to reflect your contribution as a percentage of the property meaning you benefit from any proportionate rise in its value. For example, if you contribute five per cent as a deposit, you reclaim five per cent when the property is sold.

A declaration of trust may cost in the region of £200 plus VAT and is drawn up at the same time as the other property conveyancing.

Help for First Time Buyers: Helping with the mortgage: Helping with the mortgage no longer means helping to pay for the mortgage. In the face of house prices rising at a quicker rate than salaries, lenders have been forced to design some innovative schemes that write parents into the home-buying process without it actually costing them.

· Joint mortgages: If you are still earning or are in receipt of sufficient monthly income from a pension, you could buy a house together with your child. This would mean that both of your salaries are taken into account when a lender calculates how much you can borrow. Standard lending criteria is currently 3.5 times a single salary. Joint salaries are calculated at 2.75 times both of them or three times the highest plus the lowest. However, please consider that these income multiples are only indicative and individual lenders will apply their own lending criteria. Once on the ladder, your child may be able to afford the repayments independently but be aware that this will not interest the lender. If both names are on the mortgage agreement then both of you will be jointly and severally liable for the monthly repayments, regardless of personal arrangements.

The majority of lenders require that all names on the mortgage agreement must also be stated on the property deeds – meaning you will both be property owners. If and when your child wants to take on the whole mortgage, selling your part to them will amount to a transfer of interest in the land. In this case Stamp Duty – a tax that kicks in at one per cent on property of £120,000 or more – could be payable. If you claim that your portion of the house is a gift, Stamp Duty will not be payable but you could then be liable for Capital Gains Tax (CGT) as the property is not your sole and main residence. Additionally, should you subsequently die within 7 years it is likely the gift would be treated as a potentially exempt transfer and included in your estate for inheritance tax purposes.

· Guarantor mortgages: Most lenders will now offer a ‘guarantor facility’ on their standard product ranges. This allows a parent to guarantor any shortfall in income multiples. For example, if your child earns £20,000 per annum, at 3.5 times a single salary, he/she will qualify for a mortgage of £70,000. If the property your child wants to buy is worth £120,000, you would act as guarantor for the difference – in this case £50,000.

Other lenders offer specific guarantor mortgages aimed at graduates or professionals whose salary is set to significantly increase. Some of these providers such as will only want to see that you can service the shortfall or ‘top slice’ of the loan. Other lenders will insist that the parent can service the entire loan if need be.

You do not necessarily still have to be working to act as a guarantor. Instead your overall financial circumstances are assessed with your savings, shares portfolio and assets considered. The guarantor approach offers your child a greater degree of independence, as your name does not have to be stated on either the mortgage agreement or the property deeds. If and when your child is earning enough to make the income multiples alone your name can be removed free of charge from the lender – although legal fees may be payable.

· Family offset mortgages: A traditional offset mortgage is when your savings are kept in a separate account that is linked to your mortgage. Your savings then literally offset against your mortgage debt. For example, if your outstanding mortgage is £120,000 and you have savings of £20,000 you only pay interest on a sum of £100,000. Although this means forfeiting any interest that would be paid on your savings, it also means avoiding the tax payable on this interest. In addition, you are saving interest on your mortgage debt – which is potentially set at a higher rate than the interest you would receive your credit savings balance. The long-term effect of an offset mortgage is that you may save money in interest and cut down the term of your loan.

With a ‘family offset’, the mortgage works in exactly the same way but your savings are linked to your child’s mortgage instead of your own. The product allows any number of blood relatives to link their savings to your child’s mortgage debt. Savings can be accessed at any time. The interest on the mortgage tracks the Bank of England base rate and comes with no tie-ins or redemption penalties.

1st Start: This is one of several mortgage products on the market that write parents into the finance but not necessarily the ownership of the property. The deal, which does not require a deposit, calculates the loan size by taking into account four times the parent’s income plus the child’s. The income does not have to be a salary although if it is a pension, your age will be taken into account.

The benefit of 1st Start is that, although both parties must be on the mortgage agreement (meaning you are both jointly and severally liable for the loan repayments), the parent does not have to feature on the property deeds. This overcomes Capital Gains Tax (CGT) issues if the child wants to become sole owner of the property in the near future.

· Using the income from your pension: If, when helping your child, you choose an option that takes your income into account, a pension income is usually treated in a similar manner to income from employment. Your monthly income could be from either a private or occupational pension – be it a final salary or money purchase scheme. However, your monthly expenditure from this pension income will also be considered as will your life expectancy. For example if you are going to be 98 years old at the end of a typical mortgage term of 25 years, it is unlikely that a lender will take your income into account. If a mortgage is agreed, it may have to be over a shorter term and on an interest-only basis.

Help for First Time Buyers: Making a gift: Many parents and grandparents try to avoid Inheritance Tax (IHT) by making a gift of a deposit or even a property to their children or grandchildren while they are still alive. But this does not necessarily mean avoiding tax altogether – it could simply be the case that you are hit with a different one.

It is a good idea then to ensure you are aware of the present or future tax implications of any gift you make to your child, whether in the form of cash or bricks and mortar.

Tax implications
The process of buying, selling, giving and even renting out property is riddled with tax issues. Knowing what these are and how they work in advance could result in saving a fortune.

Inheritance tax (IHT): IHT is payable on your death at a maximum rate of 40 per cent. It currently applies to estates (which incorporates property and cash) valued at £275,000 or more. IHT also applies to any gifts made in the seven-year period leading up to your death. For example, if you give more than £3,000 in cash to your child within one year, IHT will be payable on the excess sum if you die during the next seven years.

Similarly, if you sign your own property over to your child, so they can benefit from its equity growth, IHT will also be payable if you die within seven years. Additionally, under the gift with reservation rule there are still potential inheritance tax and long term care planning implications and given the complexity of issues you should consult a specialist should you require advice on this subject.

Tapering, exemptions and relief of IHT: However, IHT is priced on a tiered scale according to when you die within the seven years. For example, although maximum IHT – at 40 per cent – is payable if you die within the first three years of making a gift, only 80 per cent of this charge will be made if you die within three to four years. This tapers down to just a 20 per cent IHT charge if you die within six to seven years.

Stamp Duty: This tax now kicks in on property (or ‘land’) valued at £125,000 or more. Therefore, if you want to give your property to your child while you are still living there – and charge nothing for it – the tax will not be payable. If you sell your property to your child Stamp Duty still applies. But in this case, if it is priced at less than market value with a view to escaping the tax it could find you in breach of HM Revenue & Customs restrictions (formerly Inland Revenue) and still may result in the tax being charged.

Pre-owned Asset tax: This is a new tax that was introduced in the budget of 2005. Its purpose is to close the loophole of parents signing their property over to their children in advance – thus escaping IHT. In short, if you as a parent are living in a property that now belongs to your child and are not paying full market rent, you must pay this tax on the ‘benefit’ you are receiving. If you buy a property for your child and don’t charge them rent, this tax does not apply. This is because, if the property is in your name, IHT will apply instead if you die within seven years.

Capital gains Tax (CGT): This tax is payable at your marginal rate of tax. It applies literally to ‘capital gains’ on investments such as second homes. So if you buy a property with your child and it is not your principle residence, CGT will be applied to the profit made when you dispose of your proportion of the house. ‘Disposing of your portion of the house’ means either selling it or transferring it over to the sole name of your child. So, if you own 50 per cent of the property, which was worth £70,000 at the time of purchase and has risen to £100,000 when you dispose of your portion, CGT will be payable on the difference of £30,000, subject to any available taper relief. However, the first £8,500 of this counts as your personal allowance and is tax-free. To minimise your CGT liability you can claim ownership of just a small portion of the property or buy the portion in joint names with your partner and make use of two personal allowances.

Tax relief on renting out a room: If your child wants to boost their income by renting a room out in their new property, the first £4,250 of rent received is tax-free under the government’s Rent-a-Room scheme. Rent received above this threshold is deemed as additional income and will be taxed at the same rate as your child’s normal tax bracket.
Legal Implications
Blood is thicker than water but ink is thicker still. So if you have financially contributed to your child’s first home, don’t be afraid to draw up the relevant legal contracts to ensure that no one else – such as your child’s partner – walks off with your money.

· Joint tenancy: If you are buying a home with your child – whether for an investment purpose or to help your child get on the ladder – there are two possible ways in which joint ownership can operate. The first, ‘joint tenancy’, means that neither individual can sell without the others agreement and should one party die then the survivor inherits the others share without the need for probate and regardless of any provisions stipulated in any will. The alternative, ‘tenants in common’, allows each owner to dispose of their share as they wish and in the event of one owners death their share passes to the estate to be distributed in accordance with the provisions of their will. Should you be unsure of how you would like the ownership of a property to operate you should consult a specialist.

· Wills: If you have taken the route where your name is on the mortgage agreement but not the property deeds, you have no automatic right to the property in the event of your child’s death. In this case, should your child wish to name you as a beneficiary then this would have to be reflected in their will.

· If your child’s partner moves in: If, after a few years, your child has a partner move in and he or she contributes towards the mortgage, the couple may want this legally recorded. If your name is on the property deeds – regardless of what proportion you own – you qualify as a joint owner so any additional interest in the property will also have to be agreed by you.

However, if your name is not on the title deeds you do not represent any legal ownership of the property. Therefore you have no say in who takes an interest in it. Even if you have contributed a large deposit or have stated your name on the mortgage agreement, you will have no legal hold over the property. In this case, if your child splits from their partner who been assigned a proportion of the house, they could quite legally walk off with half of your deposit. A court might even favour a partner who had a verbal agreement – or ‘implied trust’ – with your child, if financial contribution towards the mortgage can be proved.

· Protecting yourself legally: If you wish to ensure your interest in the property is legally preserved, you need to reflect your contribution by means of a ‘declaration of trust’ otherwise known as ‘deed of trust’. This is a private legal document separate from, but running alongside, the property deeds. Its purpose is to make any arrangement you have drawn up with your child legally binding. For example, if your contribution for the deposit was £20,000, the declaration of trust could state that £20,000 will be reclaimed on sale of the house.

You could also make a loan of the £20,000 but have it secured against the property, stating that the loan is repaid when the house is sold.

Otherwise a promissory note – which makes a promise legally binding – can be drawn up by a solicitor for a small fee.

Seeking out the right financial advice
Before you make any major financial decisions, it is important to seek out the right advice. But ‘advice’ comes with several definitions. Since last November, mortgages and mortgage-related advice has come under the regulatory eye of the Financial Services Authority (FSA). Then from December last year the FSA introduced ‘depolarisation’ which reorganised the way advice is given from two options to three. Now you can seek advice from any one of the following:

· A tied adviser: These work – and will therefore recommend products – on behalf of just one lender.
· A multi-tied adviser: These will recommend products from a limited range of lenders.
· An Independent Financial Adviser (IFA): These will recommend products from the whole market.

By Helen Adams of www.FirstRungNow.com