Discretionary Trust - Mortgages and House Ownership Questions

mr_fishbulb

Hi all. Just trying to get my head around something.

Hypothetical scenario:

Say a child has saved some money for a house deposit, but not the full 25% required for a decent mortgage rate. Say for example they have 15%.

Parents want to give them some money (not a loan) to put towards the house. The money would exceed what is required to take the deposit up to 25% (for example say it would take it to 45%). Also the parents want to put the money in a discretionary trust to a) gain inheritance tax benefits, and b) protect their child's share of the house if the child got married and then divorced.

Child would be both the trustee and the beneficiary of the trust.

Figures - Child has 15%, Parents 30%. Total 45%.

Here's the questions:

1 - Would the meer mention of a discretionary trust (no matter what % of the house value was in it) make some mortgage lenders run a mile, and therefore restrict the mortgage products available to the child?

2 - If the answer to 1 is that it wouldn't be a problem, would 25% of the deposit need to be in cash in order for the child to get the 75% LTV mortgage rates? Or could the child's 15% be cash and the remaining 30% be put in the discretionary trust?

3 - Would the child have any extra difficulties when they came to selling the house if some of the money for the property came from the discretionary trust?

Sorry if it's confusing (it is for me too!). Many thanks in advance.

dimbo61

No idea about trusts at all but have you looked at Yorkshire Building Society Offset mortgages and Family and friends !
Child takes out mortgage and Mum and Dad put money into offset account ( in there name ) to save interest on mortgage payment each month.
Now if child breaks up with Other half then neither has any claim on money in offset account linked to mortgage but in Mum/dads name

mr_fishbulb

dimbo61 wrote: »

No idea about trusts at all but have you looked at Yorkshire Building Society Offset mortgages and Family and friends !
Child takes out mortgage and Mum and Dad put money into offset account ( in there name ) to save interest on mortgage payment each month.
Now if child breaks up with Other half then neither has any claim on money in offset account linked to mortgage but in Mum/dads name

Thanks - it's close, but not exactly what I'm looking for. Money can't be in the parent's name; needs to be in the child's for inheritance tax reasons.

Thrugelmir

mr_fishbulb wrote: »

(no matter what % of the house value was in it)

How do you propose that the trust owns a share of the property?

mr_fishbulb

Thrugelmir wrote: »

How do you propose that the trust owns a share of the property?

No idea. I was under the impression you could do this.

dimbo61

You make a gift of some money each year out of your offset account which is allowed ( not sure how much!)
In the mean time your son is clearing the mortgage quicker as paying much less interest and more off the capital.
One for a tax accountant/solictor if you want a trust

Gogled

1. No, quite common, but the trust would have to have a second charge, if they wern't giving the money outright.

2. I do not understand how the house would be purchased unless you advanced/lent 25% of the cash value of the property from the trust for the deposit. Obviously the kid could use his own money, but he will need 25% of the value of the property from somewhere.

3. No. It would just be treated as a debt to the trustees which would be repaid on request. You may need to appoint a second trustee to overreach any other interest.

Few technical issues. You need more than one beneficiary for a valid dis trust. Remember, a discretionary beneficiary does not mean they receive anything - only that they may, at the discretion of the trustees.

The additional bens cannot be the settlor i.e. you, as this would defeat part of the purpose. If you have no other family members add a charity or least children of you children. At the very least, the power to add future bens.

I would probably not have your kid as sole trustee. He could just advance the whole of the trust fund to himself. I would have either you or a professional as a second trustee. You would prob need a second trustee to sell anyway.

You also need to speak to a solicitor about ensuring that HMRC will not view this trust as an interest in possession trust rather than a dis trust.

There are other things to think about as well, but that's enough for now.