Help Child on Property Ladder with Bank of Mum and Dad Property Deposit Trust

The increasing taxation of our wealth by the government with higher taxes on investment property income, lower capital gains tax allowances, possibly higher capital gains tax rates to come, inheritance tax allowances frozen since 2009 and now farmers and businesses hit with reduced relief as well as unused pension funds being included in the estate for inheritance tax from April 2027:

It is time to make all decisions regarding our wealth, income and gifts to family members in a tax efficient manner and include the use of trusts to protect wealth.

Bank of Mum and Dad, Bank of Mum, Bank of Dad, Bank of Mum and Mum, Bank of Dad and Dad

Collectively all the above are known as “BoMaD”, the Bank of Mum and Dad.

BoMaD is now:

• The UK’s No 1, top placed, virtual ‘lender’ according to AI.
• Provides capital gifts or loans between £76k-£81k on average according to other major lenders, making BoMaD once of the biggest unsecured lenders in the UK.
• A BBC Study in 2019, found BoMaD to be the 10^th largest lender in the UK.

Bank of Mum and Dad Wish to Help Child onto Property Ladder

Property title/ownership is to be in the child’s name for first time buyer incentives, lower stamp duty and no additional rates of stamp duty if parents bought the property outright as a additional property or gave e.g.  £50,000 deposit to buy the property with the child (and there partner if there is one,) have mortgage in their name.

• Risk 1:  Child’s relationship breaks down or divorce with ex-partner, resulting in sales of property or loss of interests of their child if divorce settlement awards title to ex-partner.
• Risk 2:  Risk of creditors for child (or their partner’s creditors) seizing assets in child’s name including property equity.

Solution A - Loan

Bank of Mum and Dad lend the child the deposit or as much as they can afford or even the whole purchase price as part of a loan agreement with details on when repaid etc.

• If no mortgage is required, the parents can register a 1^st charge at the Land Registry on the property, so that if it sold due to relationship breakdown or other e.g.  creditor forces sales, their loan is protected as 1^st priority for debt repayment.
• If a mortgage is required, the parents can register a 2^nd charge, with the mortgage lender having the 1^st charge at the Land Registry on the property, so that if it sold due to repossession by lender, relationship breakdown or other e.g.  creditor forces sales, their loan is protected as 2^nd priority for debt repayment after the mortgage debt is repaid.

We suggest a loan because, the parents, at any point they wish, can tear up the loan agreement and remove the charge if they are happy that their child is stable, able to manage the mortgage and/or in a stable relationship.

Solution B - Property Deposit Trust

• Parents set up a trust and make a gift of money to the trust.  They name their child as the beneficiary, but they remain as trustees i.e., they are in control of the trust.
• By gifting money to the trust, the 7-year clock has started ‘ticking’ for these funds to be outside their estates for inheritance tax purposes.
• We would usually suggest a discretionary trust rather than an absolute/bare trust because the trust fund cannot then be included in the child’s financials if they ever divorce as rights are at the discretion of the trustees and not an absolute right by the child as a beneficiary..
• The trustees then lend the child money from the trust for either an outright purchase or deposit for a house, like the loan arrangement in solution A.
• The trustees then register a 1^st or 2^nd charge at the Land Registry, like the arrangement in solution A.
• The trust money is then protected from potential relationship breakdown or divorce or creditors, meaning that money’s set aside in trust to benefit children will still be protected.
• Using a Property Deposit Trust protects both parents wishes and their children (should they get into difficulty) in addition to potentially savings inheritance tax after 7 years.

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