Would it be a surprise to learn that the people who run the UK’s sixth biggest lender have minimal experience of running a large financial organisation and are unlikely to have any financial qualifications?
Even more surprising is that the financial organisation itself is completely unregulated.
Welcome to the Bank of Mum and Dad.
In 2019 families will lend or gift £6.3bn to help offspring onto the property ladder - the average donation will be £24,100, rising to a whopping £31,000 in London.
The London School of Economics report, ‘The Bank of Mum and Dad: How it really works’, published in conjunction with the Family Building Society in January this year, highlighted that about half of the funds provided were for deposits on house purchases, with the remainder used for mortgage payments, stamp duty, legal costs and so on.
While the ‘Bank of Mum and Dad’ may be one of the UK’s largest lenders, the term is something of a misnomer, because most parents (and indeed grandparents) do not behave like banks.
Few take legal or financial advice - be they the ones providing the funds or those receiving them.
There is rarely a written record of transactions and families tend not to discuss arrangements for repayment, be they loans or gifts. Families are uncomfortable talking about money.
Key questions for families and advisers to consider:
- Can a child’s partner acquire an interest in the home despite making little or no financial contribution?
- What could be the impact of Inheritance Tax?
- Joint ownership - what are the implications of Stamp Duty Land Tax?
- How and when should you act as a guarantor?
- How should you reflect it in your Will?
- If a lender dies, does the loan become a taxable matter?
Gifts can be made formally or informally but, given the size of the sums likely to be involved and the likelihood that such arrangements could be scrutinised by HMRC or other third parties in the future, it is best to document gifts and to keep paperwork in a safe place or, better still, logged with a solicitor.
One of the most important concerns for those making gifts is who might end up with the money in the future, as opposed to the original intended beneficiaries.
Preparing a Living Together Agreement (also known as LTA) with the advice of a solicitor is one of a number of preventative tools which also include arranging prenuptial agreements and having valid and up to date wills.
Donors will not only have peace of mind, but also a legal framework that ensures that gifts remain in the hands of the intended beneficiaries and not erstwhile partners.
Here are some examples of where gifting can go wrong:
Stamp Duty Land Tax
In recent years the Government has introduced a higher rate of SDLT to property purchases where the buyer already owns a property.
How could these higher rates affect the parent?
If, at the end of the day on which the purchase is completed, any of the purchasers own more than one property, the higher rates will apply.
Tax equal to 3 per cent of the total purchase price is added to the standard rate of SDLT.
Whereas the standard rate of SDLT is nil on the first £125,000 of the purchase price, there is no such “nil rate band” for the higher rates.