Tax warning over loans to help children buy a home

More parents are wading into their children’s financial affairs while helping them put down a deposit – but mortgage brokers and solicitors have warned they risk limiting their child’s borrowing options or even saddling them with a massive tax bill as a result.

Last year, more than half of under-35s received a gift or loan from their parents, according to insurer Legal & General.

And according to YouGov data, 24pc of people buying their first property after 2020 had help from their family, up from 10pc two decades earlier.

While first-time buyers are increasingly reliant on the “bank of mum and dad” to get their foot on the property ladder, a growing number of parents are reluctant to part with their savings without first putting a financial agreement in place.

Joe Cobb, of JMW Solicitors, said the law firm regularly receives inquiries from clients who are keen to ensure that gifts made to their children “won’t be up for grabs in the event of a divorce or relationship breakdown”.

So far this year, JMW has seen a 29pc increase in inquiries about pre- and post-nuptial agreements. If a prenup is not on the cards because the child is not getting married, Mr Cobb said, then instead they might choose to loan the money for a deposit.

Mortgage lender Generation Home found that parents were twice as likely to help their children if the cash is structured as a loan as opposed to a gift when it surveyed 1,000 adults in April. But Mr Cobb warned this approach is “potentially problematic in terms of obtaining commercial borrowing for a home”.

Although lenders understand that parental help is part of many first-time buyers’ efforts to get on the ladder, David Hollingworth of L&C Mortgages, a broker, said that “they would typically require that the deposit is a gift not a loan”.

Only a handful of lenders accept loan agreements, according to Chris Sykes of broker Private Finance, so people who take this route “risk limiting their options as a buyer”.

If a lender did accept the loan agreement, they may want to factor in the monthly payment for affordability purposes – potentially reducing the amount they could borrow to meet the purchase price. The other issue with lending the money for a deposit as opposed to gifting is it would remain in the parent’s estate, meaning it would be subject to inheritance tax (IHT).

To reduce the risk of getting caught out by IHT, some parents place the money into a trust before lending it.

But Mr Sykes said mortgage lenders would be reluctant to accept such a complex arrangement – and it could be a costly mistake. “If a family made a trust and had to then undo it, they’ve potentially wasted thousands of pounds,” he said.