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4 Tax traps your branch of the bank of mum and dad could easily fall into

Parents can easily find themselves the recipient of an unwanted tax bill

19 Sep 2017

Over the last few years the ‘Bank of Mum and Dad’ (the growing number of parents being forced to lend or give their children money to get them onto the property ladder) has incredibly become the 5th biggest residential property lender in the UK.  However, although these parents are only trying to act in the best interest of their children, many are finding themselves the recipient of an unwanted (not to mention significant) tax bill.

Through working with clients who help fund their children’s property ownership, we’ve identified the following 4 major tax traps you need to be aware of if you are planning to give or lend money to your children:

  1. Inheritance Tax (IHT)

If you gift a family member more than £3000 in a single tax year HMRC will class the money as a ‘potentially exempt transfer’.  This means that should you die within the following 7 years, the money will be viewed as part of your estate and, therefore, liable for inheritance tax if your estate is valued at more than £325,000.

There are however several ways to avoid this:

  • Give your child smaller amounts over several years because gifts of less than £3,000 a year are not liable for IHT
  • If one of the recipients gets married, you can give them an additional £5,000 that won’t be liable for IHT.
  • Be prepared to show your gift is made from your income rather than your savings and that the gift won’t affect your standard of living and your gifts will be exempt from IHT.

  1. Income Tax on interest payments

If you choose to charge your children interest on the loan you give them, you need to remember that interest will be taxable.

Similarly if the money gifted has been borrowed (for example as a result of re-mortgaging the parents’ house), it is unlikely you will be able to apply for tax relief on the interest on your repayments.

This means that if the terms are that your recipients only cover your interest, you could well be worse off than you would otherwise be after tax.

  1. Additional Stamp Duty

Some parental lenders think tax can be avoided if you become the co-owner of the property your children wish to purchase with your loan.  It can’t.  It just makes Stamp Duty the potential pitfall you need to be aware of.

If you already own your home any co-purchase with a family member will make the new property a second home in the eyes of HMRC.  As such you will be liable to pay Stamp Duty at the new, higher rate (3% of the purchase price on top of the standard rate of Stamp Duty) in line with the percentage of the house you now own.

  1. Capital Gains Tax (CGT)

If you co-own the property, as well as Stamp Duty you also need to be aware of potential CGT issues as, we assume, you won’t be living with your children in the new home.

When the time comes to sell (irrespective of whether you sell the whole house on the open market or gift or sell your share to your child) you will have to pay CGT on any gains you make.

This information is for guidance only and no two set of circumstances are the same.  I strongly recommend that you take the advice of an experienced tax specialist before you make any decisions, particularly as tax legislation continues to change in the wake of increased scrutiny from HMRC. 

If you have any questions relating to your personal tax, please contact us for advice.

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