Helping children get on the property ladder can create a tax hangover

According to the Office of National Statistics, in 2021, it was estimated that full-time employees could typically expect to spend around 9.1 times their workplace-based annual earnings on purchasing a home in England. Compare that to 2020 when it was 7.9 times earnings. The same source confirms that in England, average house prices increased by 14% in 2021, while average earnings fell by nearly 1%. Housing is becoming less affordable and more young people may find themselves dependant on parents to get on the property ladder.

Whilst parents may be able to assist with the deposit for the house purchase, due to the discrepancy between earnings and house prices, often families agree to buy properties jointly with their adult, unmarried children. The growth in the property’s value if sold could help the child with a deposit on a future property purchase. However, the tax consequences can be felt by both parties later down the line.

In England and Northern Ireland, the nil-rate threshold for first-time buyers’ Stamp Duty Land Tax (SDLT) relief is now £425,000 and the maximum property value eligible for this relief is £625,000. Where a property is being purchased by more than one individual, all parties will need to be first-time buyers to qualify for the relief.

An intergenerational house purchase may therefore result in the loss of this SDLT relief and a similar property stamp tax relief in Scotland. Furthermore, a stamp tax surcharge may apply to the parents buying a residential property in the UK in addition to one they already own.

Whilst property stamp taxes trigger an upfront tax charge, the capital gains tax (CGT) position is often not considered until the property’s sale. The current rate of CGT on residential property is between 18% and 28% on any chargeable gains on a disposal. A liability commonly arises when the property sold is not the seller’s main residence.

As the CGT annual exemption is being reduced gradually from 6 April 2023, any increase in property value will be hindered by the tax burden arising on the parents when the property is sold if the house is the child’s primary residence, but not the parents. This impact may be higher where the property is purchased by the family for investment purposes, as all parties could be subject to CGT on disposal.

When parents help the child buy the property as an investment property whilst the child continues to live at home, confusion can arise as to who is responsible for the income tax arising on the rental income earned. With the house legally owned by the parent(s) and the child, unless a formal deed of trust is in place, the rental income should be taxed on each individual with legal ownership.

Often this is misinterpreted, with the child (or conversely, the parent) being the only party reporting the rental profits on their annual tax return. This is not only inaccurate, but can also lead to tax underpayments and potential exposure to enquiries from HMRC. Where the child is a student, the rental income will be taken into account when making their application for student finance, which means they may be entitled to a lower amount of student finance.

Inheritance tax (IHT) should not be overlooked either. The gift of the deposit fund will constitute a potential exempt transfer made by the parent(s) if provided as an outright gift. Subject to the seven year rule, this may benefit the donor’s estate, by reducing the value of the gift to IHT on their demise.

However, at times, despite aiming to gift the funds at a later stage, families may come to an interest free loan arrangement. Whilst this exposes the child to a new financial obligation and helps them develop finance management skills, by having a loan arrangement in place, the parents’ estate is at risk of higher IHT, even in situations where they live longer than seven years from the date of their intended gift.

In some cases, unwillingly, a trust structure may be created, directly or indirectly. Where this applies, registration and annual compliance with the trust registration service must also be considered. Finally, the presence of up-to-date wills should not be overlooked once a property is acquired to avoid unnecessary family disputes at later stages.