Written by 7:58 am Real Estate

The Various Tax Implications for Parents Helping Their Children Buy Properties

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In today’s challenging property market, it’s increasingly common for parents to step in and help their children buy their first homes. 

Though it’s a generous act, buying property for children can come with many tax issues to consider. Understanding these can make a significant difference in financial planning and tax liabilities. 

Let’s delve into the different tax aspects parents should consider when helping their children step onto the property ladder.

Understanding Inheritance Tax (IHT) in Property Gifting

One of the most straightforward ways for parents to assist is by gifting money for a property deposit. This act of kindness, however, is intertwined with Inheritance Tax (IHT) implications. According to GBAC, when parents give their children money for a deposit, it’s considered a gift for IHT purposes. 

This means if a parent passes away within seven years of the gift, and their estate exceeds £325,000, IHT may be charged​​. This tax starts at 40% and reduces over seven years, emphasising the need for strategic planning.

Interest-Free Loans as an Alternative

To sidestep IHT implications, parents might opt for an interest-free loan arrangement. This strategy requires a legal document detailing the repayment terms, as Breens Solicitors explain in their in-depth guide

However, it’s crucial to note that this can impact the child’s mortgage affordability, potentially affecting the mortgage deals they can apply for​​.

Stamp Duty Land Tax (SDLT) and Joint Ownership

Another avenue parents may consider is joint ownership of the property. While this can seem appealing, it brings its tax burdens, primarily Stamp Duty Land Tax (SDLT). SDLT is a tax paid on property purchases over a certain value, and joint ownership can lead to significant SDLT costs, especially if the parent already owns a property. 

Money helper has a online tool to calculate your stamp duty tax, so you can easily calculate how much you owe tax on joint ownership properties.

Capital Gains Tax (CGT) Considerations

When parents choose joint ownership, they should also be aware of Capital Gains Tax (CGT) implications. If the property is not the parent’s main residence and increases in value, CGT will be due upon sale. This tax, between 18% and 28%, can be a significant financial burden, particularly with the CGT annual exemption reducing to £3,000 by 2024​​​​​​.

Here’s a more in-depth guide by TaxScouts on Capital Gains Tax for a better understanding of it all.

Rental Income and Income Tax Implications

If the property is purchased as an investment and rented out, both parents and children are responsible for declaring their share of the rental income for tax purposes. This aspect is often overlooked but essential to avoid tax underpayments and potential issues with HMRC​​.

Dealing with Inheritance Tax (IHT) on Loans and Gifts

When parents opt for a loan or gift arrangement, they need to consider the IHT implications carefully. While a loan can help avoid immediate IHT, it could lead to higher IHT in the long run if not structured correctly. Similarly, outright gifts can have long-term IHT consequences, especially if the parent lives for more than seven years after the gift​​.

The Risk of Unintentional Trust Structures

Unintentionally creating a trust structure is another potential issue. This scenario requires registration and annual compliance, adding another layer of complexity and obligation​​.

Bottom Line

Navigating the tax implications of helping a child buy a property is not straightforward. Parents must carefully weigh each option, considering not just the immediate benefits but also the long-term tax implications. 

With property prices and tax laws constantly evolving, staying informed and seeking professional advice is crucial to making the best decision for your family’s financial future.

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