New data from Savills reveals that the “Bank of Mum and Dad” financed over £9 billion in property purchases in 2023, highlighting a significant shift in the housing market. The research shows that 164,000 first-time buyers received family assistance, with the £9.4 billion in home purchases reflecting a doubling since 2019.

This rise is partly attributed to escalating rental costs, prompting many to pursue home ownership earlier. Additionally, favorable mortgage deals often depend on lower loan-to-value ratios, leading parents to consider contributing to their children’s first property purchases.

However, this trend brings about a dilemma for parents: should they invest, gift, or loan money to their children? Claire Johnson, a private capital lawyer at Clarke Willmott LLP, warns that uncertainty around potential changes to capital gains tax and inheritance tax rules adds to the complexity of the decision.

“Making well-informed choices is crucial,” says Claire. “The implications of using the Bank of Mum and Dad vary greatly depending on whether the parents’ financial support is a gift, a loan, or an investment.”

Historically, mortgage lenders preferred that any contributions from third parties be classified as outright gifts, simplifying matters by ensuring no other parties have an interest in the property.

Claire explains, “Gifting can initiate a seven-year period for removing the gift’s value from parents’ estates for inheritance tax purposes. It also allows parents to take pride in supporting their child’s future. However, it’s essential to consider that the gifted amount may be vulnerable to the child’s decisions and claims from third parties, especially during relationship breakdowns.”

To mitigate risks, parents are encouraged to discuss cohabitation or prenuptial agreements with their children’s partners to protect family gifts. If parents choose the loan route, a formal loan agreement is essential to safeguard the amount from third-party claims, and it can even be secured against the property as a second charge.

“While loans keep the parents’ contribution within their estate for inheritance tax purposes, they might consider forgiving the loan later when their children are more established. Any waiver should be documented through a deed,” Claire advises.

Alternatively, parents may opt to invest alongside their children, retaining some control and potential returns, though this route includes tax implications like a stamp duty surcharge and capital gains tax.

Trust planning is another option, allowing parents to set up a discretionary trust for their adult children’s benefit. Although parents cannot benefit from the trust directly, they can act as trustees and decide how to allocate funds. Contributions to the trust also start the seven-year period for inheritance tax.

Claire notes, “Trust planning is gaining popularity, with many lenders now accepting family trust loans as third-party contributions with a second charge on the property.”

In summary, seeking specialized advice is vital for parents to understand their options and make informed decisions, ensuring all documentation is properly managed.