Buying a property
for your offspring

What are your options?

The continuing credit crunch is likely to mean that the remaining months of this year will remain weak for the housing market. However, the indirect benefits from the Bank of England’s special liquidity scheme should begin to inject some much needed funds in to the mortgage market.

As securing finance has become increasingly more difficult for twenty or even thirty something adults, many parents and grandparents are stepping in, sometimes with cash to purchase a property, or for a deposit, or in other ways. So if you your offspring are currently in this position and you want to help them with buying a home, what are your options?

The ideal solution is to obviously buy a property for your children outright if you can afford it. Provided that you live seven years from the date of the purchase, the gift is exempt from inheritance tax (IHT) at the current rate of 40 per cent. The reality however for many people will be very different when you consider the effects of rising inflation, lower investment returns and the likelihood of long-term care, so you should consider all the scenarios before you make a substantial gift.

In some cases, the gift could even bring the remainder of the donor's estate below the £312,000 threshold (2008/09 tax year) for payment of the tax. Although you need to consider, if you are selling investments or other assets to pay for a property for your child, capital gains tax (CGT) or income tax could be payable.

Insurers can tailor “gift inter vivos” policies to cover children for an IHT liability on a gift in case you die within the seven years. The same careful planning is essential if you decide to gift the property you are living in. This solution can work if you have the resources to purchase a new, typically smaller, place for yourself. But if you continue to live in the property, it is classified by HM Revenue & Customs as a gift “with reservation of benefit” and subject to full IHT even if you die after the seven-year period, unless your children can prove that you paid a fair market rent.

There are other ways to help, if gifting a property outright is not within your means. The simplest is to give a deposit. This has the same tax implications as the gift of property, but anyone can make IHT-free gifts of up to £3,000 a year.

Where income, for instance falls short, having access to a substantial deposit will increase your mortgage scheme options. The larger the deposit, the better the choice of product and lower the rate of interest. Given that money is likely to be tight for first-time buyers, the last thing they want to be doing is paying more than they need to each month.

You could consider downsizing to free up cash or release equity in your home, if you would like to gift a deposit but are short of ready money. The latter means either raising a loan with your home as security or selling part of your property while retaining the right to live there. These may be possible solutions if appropriate to your situation, although neither route should be undertaken before a thorough financial review.

Whatever way you secure a deposit for your child, you may want or need to boost your child's borrowing ability, especially if their income is low. A guarantor mortgage is one that takes your income into account and where you are liable if your child defaults. If your child cannot get a regular or even a guarantor mortgage, a joint mortgage, where both you and your child are liable, may be the last resort. This puts your assets at risk and could have considerable CGT repercussions.

For wealthier parents, an alternative to gifting a home or deposit is to put a property in trust. This gives your children a secure base but allows you to maintain control. Trusts are liable to IHT of 20 per cent.