I want to help my child buy a house, what do I need to consider?

Posted on By admin

The Bank of Mum and Dad – sometimes referred to as BOMAD – Is the UK’s ninth biggest lender. With recent cost of living pressures and property prices unachievable for many, thousands of young adults need help to get started with their first home. But before you hand over the money, there are some important legal and tax issues to consider.
For ease, in this article we refer to ‘Mum and Dad’, but similar issues apply for other family members, such as grandparents, aunts/uncles, etc.

Is it a loan, gift or something else?

Are you planning to offer a loan (that you expect to be repaid one day), a gift or buying a share of the property?

Buying a share in a property
If you were thinking about buying a share in a property with one of your family, think again. The extra 3% Stamp Duty (Land Tax) charge, which applies to purchases involving someone who already owns a home, makes this a very costly option. For example, buying a £300,000 house costs an extra £9,000.

Gifting money
If you can afford to make an outright gift, and don’t need the money repaid later (say) for your own retirement, you need to consider fairness to the rest of the family. Can you afford to give your other children a similar amount? If not, you may need to amend any wills or trusts to enable this.

You also need to consider the impact of tax if you make a gift. Such a gift may use up your inheritance tax allowance (called the nil-rate band) as lifetime gifts are considered ahead of your estate on death.

Loaning money

Research suggests one third of parents won’t give their children money as a gift because they fear it may be lost in a divorce.

You may therefore think a loan is a better option for many. Three issues need consideration:

(1) The lender’s requirements, if there is a mortgage:

Any bank or building society will want to ensure that no one else has an interest in this property, and that there is no other claim on the ‘equity’ in the property. They will normally ask the customer to sign a form confirming that any money received was a gift and not a loan.

If this is done, it is hard then to claim later, e.g. if there were a divorce, that this was really a loan. This points to the value of (2).

(2) A pre-nuptial (‘pre-nup’) or post-nuptial (‘post-nup’) agreement, before or after marriage

This is a very sensible, practical answer. It can work as the English courts effectively recognise pre-nups and post nups, and will normally consider them in the event of a divorce.

There are two provisos. Each party needs to make the agreement once they have had independent legal advice, based on full disclosure of financial facts. Secondly, fairness. No agreement can override a claim by a child of the marriage, and it cannot leave one party in a situation of real need.

Suggesting a pre-nup, ahead of the happy day, appears an un-romantic, negative comment on the relationship, whether driven by parents or the ‘other half’. It may, however, be possible to present this as a good package.

Parents can offer to give a sum towards the first home if tied in with a pre-nup or post nup. They can always blame the lawyers as the ones advising this is good practice! The ‘in-law’ can be reassured the same principle would apply to gifts to any of the children. It’s not a reflection on their specific relationship!

There are two lessons from storylines in the Radio 4 soap, The Archers. Firstly, don’t suggest this on the eve of a wedding, as (apart from bad timing) it must be signed at least 28 days ahead. It’s important an individual isn’t under duress. Secondly, don’t offer financial help and then later suggest a pre-nup. It is far better as one offer!

(3) What about using a trust?

You may wish to consider putting your gift into a trust, which then either:

• Owns the property, if the whole thing is bought, or a share in it; or
• Makes a loan.

Apart from the same issues above in making a loan, two issues need addressing. Firstly, the 3% extra Stamp Duty charge (see above) applies to most trusts, though in some cases careful planning might make a work around possible.

Secondly, divorce will create problems. The divorce court may look through the trust, assume the full value is available to the child and make an order allowing for that resource.

Trusts are increasingly vulnerable on divorce. Depending on the full circumstances and the detailed documentation, a little protection may be possible.

A simple declaration of trust, of different property shares reflecting contributions made, is of limited value. It often gets overlooked later and is essentially irrelevant as between married couples.

Other tax issues arising for these arrangements include:

• Inheritance tax: it’s good to set the ‘seven-year clock’, for surviving a lifetime gift, running, but take care on details, and

• Capital Gains Tax (CGT) and the [crucial] main residence exemption.

Conclusion: While a pre-nup (or post-nup) may be right for some, the key thing is to take specific advice (ideally from a STEP member with relevant expertise) on the details of your situation. Be clear about what you are trying to achieve, and any concerns you have, and find a solution that works for you.

John D. Bunker, TEP CTA Consultant Solicitor & Chartered Tax Advisor; and Hayley Trim, Family Law Partner.

I live in Europe but own assets in the UK. What will happen to my estate when I die?

Posted on By Joanna Pegum
woman at airport

Are you among the many British citizens who have retired to Spain or Portugal, but have kept your home or other assets in the UK? If so, it is important that you understand what will happen on your death.

All EU Member States, except the UK, Ireland and Denmark, apply the EU Succession Regulation, which governs cross-border or international successions of people who have died after 17 August 2015. As the UK is not bound by the Regulation, estates of British citizens who live in a Member State but hold assets in the UK may be more complex.

Which court will deal with my succession?

Under the Regulation, the court of the Member State in which you have your last ‘habitual residence’ will deal with your worldwide estate. This applies whether the assets are real estate or movable items.

Unfortunately, the Regulation does not define the concept of ‘last habitual residence’. To work this out, you need to assess your circumstances during the years leading up to your death. You’ll need to factor in how long and how often you stayed in each country, the reasons for your presence there, and where your ‘centre of interests’ is, which takes into account the full range of your social, domestic, financial, political and cultural links.

Since the Regulation does not apply in the UK, successions involving assets in a Member State as well as in the UK can give rise to problems, known as ’positive conflicts of jurisdiction’, meaning that the courts of both countries may want to deal with your succession. In order to limit this uncertainty, you should seek advice from an expert on the practical implications of the Regulation.

Which law will govern my succession?

As with the decisions as to what court deals with your succession, under the Regulation, the law of the country in which you have your last habitual residence will govern your entire succession.

If the law of a European country applies, this could also mean that some of your heirs will enjoy an enforceable right to a share of your estate, irrespective of what you may have specified in your will. This is known as ‘forced heirship’.

The Regulation does offer you another option, however. You can choose the law of your nationality (or one of your nationalities, if you hold several passports) to apply to your succession.

As this depends on your family circumstances, you should speak to an expert about making a choice of law to govern your succession.

David W Wilson TEP is a Partner/Attorney at Law at Schellenberg Wittmer in Geneva, Switzerland.

Where is my domicile?

Posted on By admin
man looks at earth, searches for domicile

Domicile describes the country that you consider to be your home or where you have your permanent home. It is not the same as nationality, citizenship or residence.

You can only have one domicile at a time and the domicile that is allocated to you defines which system of law will be applicable to you in relation to things like marriage, divorce and succession.

The UK has three different types:

  1. Origin – where you are born, take father’s if married or mother’s if unmarried
  2. Dependency – children under 16 acquire their parents’ domicile (women would take husband’s when getting married prior to 1973)
  3. Choice – physical presence and an intention to stay ‘indefinitely’

Can I change my domicile?

Everyone acquires a domicile at birth. If you wish to change your domicile of origin or dependency then you need take a number of steps:

  • Purchasing property in new domicile, and abandoning property in old
  • Obtaining a new domicile passport and relinquishing the old one
  • Closing accounts and opening accounts in new domicile
  • Moving family and children’s education to new domicile
  • Drawing up a will and arranging to be buried in new domicile

It is very difficult to acquire a new domicile and the intention must be proven that not only do you intend to stay in the new domicile permanently, but to spend your final days there.

What does ‘deemed domiciled’ mean?

Once a person has been tax resident in the UK for at least 17 out of the preceding 20 tax years they will be ‘deemed domiciled’ in the UK. They will not have a choice about this and will not be able to change their domicile unless they can prove their physical presence and an intention to stay ‘indefinitely’ in another domicile outside of the UK.

Figuring it out

If you are uncertain of your domicile it would be prudent to speak to an expert, since a UK-domiciled person will be subject to UK inheritance tax on their worldwide assets.

*Although it is common to refer to UK domicile, for tax purposes a person is actually domiciled in England & Wales, Scotland or Northern Ireland.

It’s never too soon to make a will

Posted on By admin
young man with cat

What have you got planned for later life? A cruise might be nice, or a cottage by the sea, but what about money? Do you know if you could afford a care home? Have you made a will? Do you know who would care for your family?

If your answers are no, you’re not alone. Apart from having a pension, research from savings organisation NS&I has shown that over half of us have not made any further financial plans.

More than a third haven’t made provision for long-term illness, nursing or care home fees, either for ourselves, or for other family members. Another third have thought about it – but haven’t put any plans into place.

Even such a basic step as making a will seems to elude most of us, even though almost everyone agrees it’s important.

Many people feel that they are too young to make a will, even those in the 45-64 age bracket.

It seems to be the big steps in life that finally prompt people to take action, notably getting married and having children.

However, it’s worth thinking of your family at every stage in life. If you die without making a will, they can be put under enormous strain trying to work out your wishes. They may face higher tax bills too.

If you don’t make a will, standard rules known as the intestacy rules will apply, and your estate could be divided up in ways you’d never have wanted.

For example, if you had been married and separated, but never got divorced, your ex-husband or wife would automatically benefit, even if you had spent many years with a new partner. If you had not married, but lived with a partner, your parents or siblings would inherit, and your partner may get nothing.

‘Many people assume their possessions will simply pass automatically to their partner or children, or believe their assets are too insignificant to need a formal arrangement’, says Emily Deane TEP from STEP.

‘But if you die without making a will, the intestacy rules will be applied, and this may not be what you want,’ she added. ‘The only certain way to ensure that your partner or relatives inherit in line with your wishes is by making a will.’

How do I value my estate?

Posted on By admin
couple in town

One of the first questions you are asked when making a will or considering your inheritance tax liability is: ‘what is the value of your estate?’. Like many people, you may not have considered this before and so may be left wondering what your ‘estate’ actually consists of and how you are supposed to put a value on it.

To find out how much your estate is worth you need to calculate the value of your assets, then minus your liabilities.

Assets in your estate

Your home will almost certainly be your most valuable asset, so start with that. Then add in bank and building society accounts and personal possessions (car/household contents/jewellery, etc). If you are valuing your estate for inheritance tax purposes, use a professional to value any possession worth more than £500. For items worth less than that, HMRC (the UK tax office: HM Revenue and Customs) will accept an estimate.

You should also include:

  • Pensions (lump sums payable on death)
  • Life insurance policies
  • Stocks and shares
  • Bonds
  • Interest in other properties
  • Any money you are owed

Liabilities

Your liabilities consist of anything you owe. These include:

  • Mortgages
  • Loans
  • Credit cards
  • Overdraft
  • Any kind of debt

Assets – liabilities = estate value

Having worked out the value of your estate you are now able to figure out your inheritance tax liability. For information on this, read ‘How can I prepare for inheritance tax?’