How to help your kids buy a house

The housing market is booming and as a result the Bank of Mum and Dad is still underpinning a lot of purchases. But, do you understand the tax implications of helping your kids onto the property ladder?

The average house price is £192,372, according to Halifax, meaning the average first time buyer needs a deposit of at least £9,618. In reality tight lending policies mean most first time buyers need a far bigger deposit – the average was put at £31,000 by Halifax in 2013 . For almost half of buyers that is more than they can afford on their own. As a result 46% of house purchases last year made by first-time buyers were helped by the Bank of Mum and Dad.

If you are thinking of helping your child get on the property ladder you need to consider the tax implications of how you do it otherwise you could find yourself facing a surprise tax bill.

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1. Gifting a Deposit
The most straightforward way you can help your child out with buying them a house is to give them some money. This has only minor tax implications. If you make it clear the money is a gift – ideally accompany it with written documentation saying so – then the money is classed as a Potentially Exempt Transfer. This means it is tax-free as long as you live for seven years after the gift. If you don't the money will still count as part of your estate and could mean it is liable for inheritance tax if your entire estate is valued at over £325,000.

2. Loaning a Deposit
If you prefer you can choose to loan the money to your child rather than simply giving them it. How much interest you charge is up to you – you can make it an interest-free loan. You can also choose whether you want your child to repay the money in instalments or in a lump sum when they sell the home.

Again you need to make it clear that this is a gifted loan. Loans are still classed as part of your estate so this needs to be a Potentially Exempt Transfer so that after seven years it will no longer be potentially liable for inheritance tax.

Be aware though that any repayments your child has to make to you will be included in their mortgage lender's affordability calculations and could affect how much they can borrow.

3. Part-Owning the Home
Another option is to use your money to help your child buy their home but have you listed as a part-owner of the property. This means you get to benefit from any increase in the property price when they sell, but it has more complicated tax implications.

As part of the house is in your name it classes as part of your estate so will be liable for inheritance tax if your whole estate is worth more than £325,000.

Also, when the house is sold any profit you make on your share may be liable for capital gains tax as it is not your main residence.

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4. Tying your Savings to their Mortgage
If you don't want to hand over your savings to your child, or invest in their home another option is to help them by putting your money into a savings account that is tied to their mortgage.

This option means your cash is still yours, you earn interest on it, but your child also gets help onto the property ladder.

Barclays Family Springboard mortgage see the homebuyer put down a 5% deposit, while their parents or other family member puts 10% of the house price into a Helpful Start Account. After three years the family member gets their 10% back plus interest (currently a competitive 2%) as long as the homeowner has kept up with their mortgage repayments.

This system keeps your taxes simple. You still own your money so it is potentially liable for inheritance tax, and the interest earned will have income tax deducted.

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