Page last updated at 03:21 GMT, Wednesday, 12 December 2007

Helping your children buy their property

Money Talk
By Leonie Kerswill

Leonie Kerswill
With property prices already out of reach for many, and uncertainties around interest rates, first-time buyers often struggle to get their foot on the property ladder.

"The Bank of Mum and Dad" is often called on to help.

However, there are important tax considerations when helping grown-up children buy a home.

Giving away sums of money has potential inheritance tax (IHT) consequences.

Unless the amounts gifted qualify for one of the various exemptions available, then the donor has to survive for seven years from the date of the gift to make sure that it is free from IHT.

Annual allowance

Probably the most straightforward way, for those fortunate enough to be able to help their children or grandchildren save towards a deposit, is for each parent or grandparent to make use of their annual IHT exemption.

This allows people to give away up to 3,000 per tax year with no IHT consequences.

They can also carry forward all or any part of the 3,000 exemption not used to the next year.

That means that up to 6,000 can be given away in any one year if none of the exemption from the year before has been used.

So a husband and wife who hadn't used their exemption this year or last could gift 12,000 to their son or daughter towards a deposit and stamp duty costs.

It is worth remembering that this is an annual allowance and so they could then gift a further 6,000 between them after 5 April 2008.

Surplus income

For many homeowners, the monthly mortgage expense is a daunting prospect, particularly as they move up the property ladder and increase the size of their property.

This is a fantastic opportunity to help their offspring with regular contributions towards the mortgage

Help with monthly costs can be provided in many ways and both individuals and mortgage providers have become increasingly open-minded and flexible about how this is achieved.

One of the most useful, but often overlooked, IHT reliefs available is the exemption for regular gifts out of surplus income.

This allows an individual to achieve 100% IHT relief where they make regular gifts of income which are in excess of their day-to-day needs.

There are some rules to be followed, but for many, this is a fantastic opportunity to help their offspring with regular contributions towards the mortgage or other monthly costs.

Extra property

Nowadays, owning multiple properties is relatively common and many see property ownership as an important feature of their investment strategy.

For example, if someone buys a commercial or buy-to-let property as an investment for the next generation, rental income will go towards mortgage payments.

Any shortfall during periods when the property is not let could be covered by the exemption for regular gifts out of income.

Any rental surplus will be taxable on the child (unless they are a minor, when the income will be taxed on the parent unless it is less than 100), who may well have unused personal allowances and lower rate tax bands.

On a sale of the property, any capital gain will be the child's.

So if they have lived in the property as their main residence, for example while at university, then a proportion at least, if not all, of the gain should be exempt from CGT.

Unlike for income tax, even if the gain arises to a minor child, it will still be treated as their gain against which they can offset their annual CGT exemption (9,200 for 2007/08) and lower rate tax bands.

Family homes

One issue many families wrestle with is how to reduce the IHT paid on the family home.

If the children sell the home, and it is not their main residence, they will have to pay capital gains tax

The problem has been resolved for many by the recent announcement that the nil rate band (currently 300,000) is available to the surviving spouse (or civil partner) if it was not used by the deceased.

There are many emotional ties that prevent making an outright gift of the family home an option.

But, if parents do want to give their home away to children while they are still alive, they should bear in mind some important points.

Gifts to children - unlike gifts to spouses or civil partners - are not exempt from IHT unless the person making the gift lives for seven years after making them.

If the parent keeps living in the property without paying a full market rent (which the children pay tax on), it is not an outright gift, but a gift with reservation.

That means it is still treated as part of that person's estate and is liable for IHT.

The parent may be liable to pay an income tax charge on the benefit they get from having free or low cost use of property they formerly owned (or provided the funds to purchase).

Once parents have given their home away, their children own it and it becomes part of their assets.

So if they are bankrupted or divorced, the home may have to be sold to pay creditors or to fund part of a divorce settlement. If the children sell the home and it is not their main residence, they will have to pay capital gains tax on any increase in its value.

While the family home continues to represent a large part of most people's wealth, there will need to be good communication within the family to ensure that, as a unit, the benefit of property ownership is maximised while the commercial and tax costs are minimised.

A regular review of asset ownership, maintenance of records and a clear idea of what their "usual cost of living" is should be part of a person's routine tax housekeeping.

The opinions expressed are those of the author and are not held by the BBC unless specifically stated. The material is for general information only and does not constitute investment, tax, legal or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Always obtain independent, professional advice for your own particular situation.

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