Consider this before helping your child onto the property ladder

The Law Society has warned parents to seek advice before offering financial assistance to help their children onto the property ladder.

The falling price of property over the past 12 months has sparked the interest of many first time buyers previously frustrated by the unaffordable asking prices in many parts of the UK.  However, the squeeze on the mortgage market as a result of the credit crunch has left many would-be buyers unable to raise the hefty deposits necessary to secure the most competitive mortgage deals.

It is estimated that as many as 8 out of 10 first-time buyers in the London area are receiving financial assistance of some description from their parents in order to find the 25% deposit required by lenders in the current market.

Many parents, eager to help their children take advantage of the low property prices, are assisting their children by offering interest-free loans; early inheritance gifts; or are stumping up cash as an investment.

The president of the Law Society, Paul Marsh, cautioned that such moves can be ‘fraught with difficulties’, and that parents should first take appropriate advice fitting with their circumstances before handing over the cash.

Investment
The parent may have to pay capital gains tax if the money is leant with interest and the value of the property rises.  Seek legal advice to ensure that both parties understand the terms and conditions of the investment.

Outright gift
This can have financial implications. If the parent dies within seven years of gifting the money the child will have to pay inheritance tax on the sum.

Interest-free loan
These are often set-up very informally, and can be the source of the biggest problems. It is important to get a simple legal document set up to show the details of the basis of the loan, what will happen to the money if one party dies, if the child and their spouse separate, or if the parent needs the money back. This is especially important if the parent is gifting money to their child and partner; inheritance laws mean that the money (or property) could automatically pass to the spouse.
Source: guardian.co.uk