23 Aug 2017

Parents should be aware of hidden costs in helping children with deposits

Parents should be aware of hidden costs in helping children with deposits

Parents need to be aware of a wide range of unexpected costs and risks when helping their children with a house deposit.

Mutual insurer Royal London has now highlighted issues which dads and mums need to consider and some of the potential pitfalls.

Helen Morrissey, of Royal London, said: “Steep house price rises in recent years have made it difficult for younger people to get on the housing ladder, and it is understandable that parents want to help. 

"However, making the decision to hand over a large sum of money, whether as a loan or a gift, is a major financial commitment and parents need to consider all the options before deciding to do this. 

"Parents must ensure they are aware of the potential tax implications. Giving away or lending a large sum could affect them further down the line if their circumstances change.

“In addition, arguments over whether money needs to be repaid, or over what time period, have the potential to cause considerable harm to the parent/child relationship. 

"It may seem very formal but all parties should consider taking legal or financial advice and, if needs be, get something down in writing. Taking this approach can bring much-needed clarity to the process and save both parties a lot of grief.”

Issues and potential pitfalls highlighted by the insurer include:

  • Taxation: Gifts towards a deposit can still count towards a parent’s estate for Inheritance Tax purposes if they die within seven years of giving the money
  • Future financial hardship of parent or child: Parents can hand over what they believe is an affordable amount only to find their own
    circumstances change due to redundancy or ill-health and they find themselves short of money. Similarly, children may initially be able to make repayments of a loan to parents only to find that it becomes a struggle once they have children or face unemployment or sickness absence
  • Impact of falling house prices: If the property has to be sold while in negative equity due to a housing-market downturn, then parents may not see their money returned when they expected
  • Changes in the relationship status of the child: Parents will want to help their children, but may want to think what would happen if their child forms a new relationship or an existing relationship breaks down - could there be a dispute about how much of the house is owned by each party?
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