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.
Buying with a friend or partner
In a time of consistently high property prices the only option for many first time buyers is to buy jointly with a partner. So what does the parent providing the help need to consider?
If parents are helping a child who is unmarried but buying with a partner, they should consider an LTA.
This can be necessary whether parents are gifting, loaning or acting as guarantors.
It is the perfect opportunity for all parties to discuss and record any third party contribution made towards the purchase of the property and how it will be dealt with in the event of a breakdown in the relationship.
If the child intends to allow another person (for example, a partner or friend) to live at the property, it is a good idea to make a Tenancy Agreement, as well as an LTA to set out the responsibilities and rights of each party.
This will make it clear who owns what (not just the property) and also sets the expectations for meeting the costs of living and, importantly, what would happen if the relationship were to end.
Is a joint mortgage with a parent a viable option?
Yes, but it has financial implications for the parents.
As the parents already own their own home, the new property would be taxed as a second home and an additional 3 per cent Stamp Duty Land Tax would become payable.
If and when the house is sold in the future, the parent’s share of the property may result in a Capital Gains Tax bill of up to 28 per cent on the increased value, as it is not their main residence.
The mortgage term may take the parents past their desired retirement date which may mean the lender requires proof of income in retirement, or delay the retirement date.
There would also be implications for the parents for any future loan / credit arrangements as this new mortgage would need to be declared on any future applications.