Expert advice from a tax advisor on how best to help your children onto the property ladder

That means that getting on the property ladder has never been a more daunting prospect for the younger generation.

Increasingly, the “Bank of Mum of Dad” is stepping in to help children reach that first rung of the ladder but with worries of financial maturity, relationship breakdowns and a loss of family wealth, a gift of property is not without its complexities and concerns.

The way in which a parent provides financial assistance can have a great impact on the security of their funds and the tax they pay, so below we explore common options available to parents investing in homes for their adult children.

Outright Gift: A parent can gift a cash sum to their child to use as a deposit or to purchase a property and this is a simple process.

However, any funds provided should be treated as an unreserved gift.

An outright gift means a child owns their own property, it is their asset, and they are free to sell it without consultation and that means there is a risk of value being lost to estranged partners and the asset is vulnerable in financial difficulties.

A cash gift is known as a potentially exempt transfer (PET) and this does not incur an immediate inheritance tax, aka IHT, charge and the value will fall out of the parents’ estate provided they survive for seven years after the gift.

This can reduce their taxable estate and avoid a 40 per cent IHT charge.

As the property will be owned by the child, assuming it is their main residence during ownership, they will receive private residence relief on any gains arising, exempting them from capital gains tax at the higher rate of 28 per cent.

Joint Ownership: A lack of control can encourage parents to jointly purchase property with their children. This gives greater power over the asset and prevents the child from being able to make a sale without consent.

Whilst increasing protection, joint ownership can trigger a partial loss of prvate residence relief, with gains potentially exposed to a 28 per cent capital gains charge.

Additionally, where parents are purchasing an interest in additional property, an increased stamp duty charge can arise on their share of the value.

Parents can instead consider making a loan to their child but loan will remain within their estate for inheritance tax purposes and prevents them from benefitting from a return on their investment.

Using a Trust: A family trust can offer the best of all worlds in terms of gifting and maintaining control and decision making.

Typically, an individual gift up to £325,000 can be made into a trust without incurring an iheritance tax charge and granting a child the right to occupy the property means they will usually qualify for private residence relief and carefully drafted trust deeds can avoid tax implication.

Using a trust structure can permit tax efficient and protected gifts to be made to children, allowing parents to assist financially without the worries attached to outright gifts. Kim Major is a Private Clients Manager at Azets and can be contacted on [email protected]