Buying a house for your child is an amazing way to invest in their future and give them a step up when it comes to getting on the property ladder. If you can afford it, making sure they are set up with a property can not only give them somewhere to live, but can save them thousands of pounds on rent and could even provide them with an additional revenue source by charging rent.
When purchasing a property for your child, you will want to avoid taxes and fees as much as possible in order for it to be a better investment. One option would be to buy a house in your child’s name; however, this comes with possible risks and costs which could be avoided. Here we share the different options available considering tax implications.
Is It Sensible to Buy a House in the UK and Put It in My Child’s Name?
It is possible to buy a house and put it in your child’s name and this can be a relatively simple process; however, it may not be the best option for you.
If you are able to buy the house outright (i.e. no need for a mortgage) and you are buying the property for an adult child (over the age of 18), buying a house in your child’s name can be relatively straightforward. It works in exactly the same way as it normally would to buy a house in the UK.
In the case that your child is under the age of 18, you would most likely need to create a trust in order to hold the property on their behalf until they are of age. Until the age of 18, properties that are gifted to children cannot be sold, mortgaged or otherwise dealt with without court approval which can be expensive and usually unsuccessful.
There is also the option of transferring deeds for an existing property into someone else’s name; for this, you would typically just need to pay the fees charged by a solicitor.
How Can I Fund My Child’s Property?
There are numerous ways in which to fund the purchase of a property for your children, should you so wish. You should always assess your own, personal financial circumstances before committing to buying a property for your child, to make sure everything is affordable and to ensure it works for you as well as your child. Common ways in which to fund the purchase of a property for children and family members include:
- Selling your home online and downsizing
- Remortgaging your home to fund the purchase
- Selling a property fast to unlock funds for your children
- Getting a bank loan
- Equity release
- Utilising existing savings
What Are the Risks of Buying a House in Your Child’s Name?
Even if you buy a house in your child’s name, this does not mean that they will be exempt from owing inheritance tax in the future. Although neither the parent or child will need to pay any immediate tax, they house may eventually be liable for inheritance tax. If a parent who buys the property dies within 7 years of giving the money, the child may still need to pay inheritance tax on the person’s whole estate.
Additionally, it can be an expensive process. If you buy the house yourself, rather than gifting your child the money to buy the house, you will most likely have to pay stamp duty and capital gains tax on the purchase as it will not be the first property you purchase. For your child, it is likely that this is their first home meaning that if they buy the property themselves, they will be entitled to all the benefits owed to first time buyers.
If you are buying a house in your child’s name for them to share with a partner, and they end up divorcing their partner, the partner could be entitled to half of the property. This means that their partner could end up with half of an investment which you intended only for your child.
Should I Gift My Child Money to Buy a House?
In some cases, it may be simpler and cheaper to give your child money in order for them to buy a property themselves. However, you will need to make a distinction between whether the money is a gift or a loan as this has serious tax implications.
If your child is applying for a mortgage in order to purchase the property, they will need to declare if any money received was a loan or a gift. When declaring the money as a loan, it has the potential to impact the mortgage deal offered by the bank. If you falsely declare a loan as a gift, you risk committing mortgage fraud which will have serious ramifications.
Thus, if you are deciding to give your child money to buy a house, it needs to be a gift rather than a loan, meaning there is no plan for repayment.
Should I Buy a Property in a Trust for My Child?
Buying a property in a trust might be the best option if you are wanting to buy a property for your child as you can avoid expensive capital gains tax and inheritance tax. However, it can also be more complicated. If you want to opt for buying a property in a trust, you will need to name a parent, or both parents, as trustees at a minimal cost. Rather than buying the house yourself, you will lend the deposit money needed directly to the trust fund. Then, the trust will make the purchase using a mortgage with the parent most likely acting as the guarantor.
You can set up the trust (either a life interest trust or a discretionary trust) naming the child as the beneficiary. Depending on the type of trust chosen, they will either receive all income automatically or not. Whichever kind of trust you choose, the beneficiary or beneficiaries will have the right to live in said property without the need to pay rent – this is what is referred to as “life tenants.” Children who are beneficiaries will be considered by law to have their own property meaning that they are exempt from capital gains tax.