Use a Trust and make sure the money stays in the family
There may be a bit of a myth that has taken hold in recent times, one that suggests property prices have been heating up producing an unsustainable position.
In reality the average property price in the UK rose around 35% between 2009 and early 2017; hardly an over-exuberant rise.
Clearly the regional variations, especially in London and places like Bristol paint a slightly different picture, but for the UK as a whole the increase in prices has been steady not spectacular. Many commentators, level-headed and without bias, believe there is a lot more to come in terms of further price increases.
Whether this turns out to be correct we shall wait and see; what is not in doubt however is:
- Many people still yearn to buy property and get on the so-called property ladder;
- Many of those same people are struggling to do so.
The property ownership dream has become something of a nightmare for many, especially in younger age groups.
The trend today that is growing strongest seems to be the ‘bank of mum and dad’ support, particularly in terms of providing that so-hard-to-obtain ‘deposit’ which is the main block for many aspiring buyers. Once you have the deposit, which can often be something like 30% of the property value, the mortgage cost is often no more than a comparable rental payment, sometimes less.
So the difficulty for most is the deposit. If mum and dad (or granny and grandpa) can help with this, it can unblock the blockage. But simply having the money to help is one thing; how best to do this is another…….
If parents or grandparents are going to help their kids/grandkids buy property then they have to deal with one giant elephant in the room: separation and divorce.
How can you help your own offspring without risking your support ending up in the hands of your daughter’s ex-husband (or your son’s ex-wife)? How can you ensure that any financial help is robust enough to keep your gift or help intact should the in-law run off with the milkman (or lady)?
The solution to this is so simple it almost seems to be some form of trick.
Make sure any help, gift, support or hand-out, however it is provided, is subject to a Trust.
This is a legal mechanism which allows the individual making the gift to do so, making it subject to certain provisions. These can include protection against separation and divorce. So instead of the parent handing money to the child to support the property purchase, the parent places the money into a Trust for the benefit of the child and the Trust loans the money to the child to be used to purchase (or help in the purchase) of the property.
For example, if a parent gifts a child £100,000 to act as a deposit to buy a property with the child’s partner (wife/husband or they could be unmarried) then a separation or divorce takes place a year or two later, the ex is likely to be entitled to £50,000 of that £100,000.
However place the £100,000 in a Trust, whereby the Trust loans the £100,000 to the child to help with the deposit, now on divorce the £100,000 has to be repaid to the Trust, which retains it for the benefit of the child. The ‘ex’ gets nothing from that original gift.
The problem with trusts is often they are perceived as exotic tax planning devises, suitable just for the very rich. In reality trusts are available for anyone to use, they are simple to put in place and they are a cost effective solution. In this respect they are mostly about bloodline protection, not tax savings.
They are perfect for situations where money is being gifted by an individual, typically a parent, but could be anyone, to help with a property purchase. This is because the Trust can protect against that common threat to family wealth, divorce.
It is totally straightforward: by putting the gift into Trust first and then the Trust loaning out the proceeds, the protection is created. There is no legal or tax complication, it is mainstream, simple, but highly effective, financial planning in action.
To discuss this please contact us via email at firstname.lastname@example.org or by calling us on 0292o 450 143.
For more information on trusts click here and download our free guide