Helping adult child buy first home

Kismet_Hardy

My husband and I are planning to help our adult son buy his first home (and move out of the family home!). We live in a very expensive part of the UK and it is impossible for him to do this without our help. This is the plan we have come up with:-

• We shall provide the full amount needed to purchase a 2 bed flat, which shall be in son's name. Most of this will come from remortgaging our home and a very small amount will be a gift coming from our savings.

• The remortgage is not going to be a problem as we have plenty of equity and we are both good earners. 

• We can only get a mortgage for 8 years, due to our ages. This will need to be a part interest and part repayment loan. We plan to get a 5 year fix at 1.4%.

• Son will let the other room out to one of his many friends who are in exactly the same position as he is and pay the monthly mortgage payments into an account we shall set up specifically for this purpose. We shall probably put a bit extra in the account just in case there is a mishap with any of the monthly payments but we are not concerned that son will not pay or that he will lose his job. Over the 5 years of the fix (and possibly over 8 years if interest rates remain low), he should be able to pay off a pretty good chunk of the loan, which should put him in the position to get his own mortgage at that stage. Worst case scenario is that the flat will have to be sold at that stage, unless we decide to downsize and give all the kids some cash.   

• We shall be entering into a legal agreement with him, as we have other children whose interests need to be protected.

We have looked at the figures very carefully and have a mortgage broker sorting the loan out for us. It all works, at least on paper. There is only one concern we have at the moment (although you may be able to point out other issues) and that relates to the tax position. We don't want  the mortgage payments made by the son and his lodger to be seen as our income, as it simply will not be our income. 

I should be grateful to receive any words of wisdom from the knowledgeable people out there please. Can I please apologise in advance if I do not come back immediately to any responses. I am working and shall come back when I can.

steampowered

Depending on what the agreement says, you are either planning to:
- Gift the money to your son
OR
- Loan the money to your son

Either way, the money would belong to your son when he receives it, and the property would belong to him.

There is no tax for you or for him on the money he sends back to you to enable you to pay the mortgage repayments.

As the property belongs to your son, income from letting out the room is potentially taxable for your son. There is a tax exemption if the let is less than £7,500 per year, so your son will only need to pay tax on it if his mate pays more than that.

Kismet_Hardy

Thank you streampowered. This is what we thought was the case, but wanted to be sure. The mortgage amount will be a loan.
We know about the £7,500 per year. The rent won't be as much as this for the lodger, so there won't be a problem.

Indigo_and_Violet

Kismet_Hardy said:

• We don't want  the mortgage payments made by the son and his lodger to be seen as our income, as it simply will not be our income. 

I'm wondering how you've come to this conclusion? They are payments from someone else that are being used to pay off a mortgage in your name. 
When you say 'we shall provide the full amount needed to buy a 2 bedroom flat' do you mean you're providing the deposit and using the mortgage to pay off the rest of the price of the flat or you're being cash buyers for the full purchase price of the flat and the only borrowing will be against your own home?
How do you plan to give the son back the lump sum you expect him to have built up over the time course? Is son income+lodger income going to be more than the mortgage payments hence you're effectively operating a savings scheme for him or is son income+lodger income just going to cover the mortgage, in which case won't you have to remortgage again to give him a lump sum deposit?

user1977

Indigo_and_Violet said:

Kismet_Hardy said:

• We don't want  the mortgage payments made by the son and his lodger to be seen as our income, as it simply will not be our income. 

I'm wondering how you've come to this conclusion? They are payments from someone else that are being used to pay off a mortgage in your name. 

But it isn't "income" which is relevant for Income Tax purposes.

saajan_12

Kismet_Hardy said:

My husband and I are planning to help our adult son buy his first home (and move out of the family home!). We live in a very expensive part of the UK and it is impossible for him to do this without our help. This is the plan we have come up with:-

• We shall provide the full amount needed to purchase a 2 bed flat, which shall be in son's name. Most of this will come from remortgaging our home and a very small amount will be a gift coming from our savings. - is this aflat and area son expects to stay for a long time? As buying / selling costs can be high, plus he'll use up his FTB status for the next purchase. Could end up cheaper to rent if its only a few years. 

• The remortgage is not going to be a problem as we have plenty of equity and we are both good earners. 

• We can only get a mortgage for 8 years, due to our ages. This will need to be a part interest and part repayment loan. We plan to get a 5 year fix at 1.4%.

• Son will let the other room out to one of his many friends who are in exactly the same position as he is and pay the monthly mortgage payments into an account we shall set up specifically for this purpose. - friend would be son's lodger, and son would be a LL. This isn't the same as having a tenant with full on tenant rights, but son does need to think through his responsibilities. Also income from the friend would be son's income (under rent a room scheme, taxed above 7.5k). 
• We shall probably put a bit extra in the account just in case there is a mishap with any of the monthly payments but we are not concerned that son will not pay or that he will lose his job. Over the 5 years of the fix (and possibly over 8 years if interest rates remain low), he should be able to pay off a pretty good chunk of the loan, which should put him in the position to get his own mortgage at that stage.  - the mortgage is your loan. You can then lend on the money to son. Any money from son repaying capital is just that, but Any interest you charge him would be your income. 
• Worst case scenario is that the flat will have to be sold at that stage, unless we decide to downsize and give all the kids some cash.   

• We shall be entering into a legal agreement with him, as we have other children whose interests need to be protected. - good idea. The legal agreement is a loan, and you can secure that via a charge on the property. 

We have looked at the figures very carefully and have a mortgage broker sorting the loan out for us. It all works, at least on paper. There is only one concern we have at the moment (although you may be able to point out other issues) and that relates to the tax position. We don't want  the mortgage payments made by the son and his lodger to be seen as our income, as it simply will not be our income. - 

I should be grateful to receive any words of wisdom from the knowledgeable people out there please. Can I please apologise in advance if I do not come back immediately to any responses. I am working and shall come back when I can.

You're really making a private mortgage for 100% of the purchase price. He can then repay the capital, with no tax, but any interest you earn is your income, subject to income tax. 
Your mortgage is your loan, which you pay off. If son happens to pay you an equivalent amount, then the interest portion of that (1.4%) is income taxable. 

Legal agreement for the loan is a good idea, and can be registered as a charge on the flat. 

Son's friend would be his lodger, son would be landord. Read up on the rent a room scheme - the first £7.5k a year is tax free, then beyond that son would pay income tax on the rent from the lodger. 

Kismet_Hardy

Indigo_and_violet - We shall fund the entire purchase. Most of it will be from the borrowing against our home - something up to £250k. A very small amount, perhaps 10K, will be a gift. We aren't intending to make any profit whatsoever from the deal. The whole point is to get him on the housing ladder and we can't see any other way to do this as we can't gift him any more (we have other kids at Uni) and lenders won't give him a mortgage if we loan part of the amount needed. The mortgage we are taking out is going to be part interest only and part repayment. If, at the end of 5 years, he has managed to pay £40k off the mortgage, which he might be able to do with a lodger and the low interest rate, he will need a smaller mortgage to pay the outstanding amount of our mortgage off.  
Saajan_12 - Yes, it is a private mortgage but we don't intend to charge any interest. We just want him to cover the mortgage repayments. I'm a little confused about what you say about the 1.4% being liable to income tax, but I'll give it more thought when I have the opportunity. 

merlin51

Others have dealt with the legal/ financial issues. However what struck me was the potential impact on your other children. What do they think about you putting all your eggs in the eldest’s basket? Can you treat them all the same when the time comes to set them up in their first homes?

Kismet_Hardy

merlin51 - This child hasn't been to university (and is a few years older than the others) and the others are being helped with Uni costs. In any event, there may be other funds available at a later stage (e.g. pension lump sums) and, ultimately, we shall downsize. We have never operated on the basis that all need to be treated exactly the same. They all know that we love them equally and want the best for them all. If one needs something now, then we shall help if we can. The others know we shall help them in due course. We are very lucky in that they all get on very well and there isn't a hint of nastiness or jealously between them. 

Owleyes00

I agree with Merlin. Very awkward indeed if you have other children that will very likely be in the same situation. Is there no way you can use the money to support each of your children partially.

Also I think the age of your son is relevant here. Getting on the housing ladder is probably more pressing if he was 35 than if he was 22 and if closer to the latter I would be looking to wait and see if I could contribute in a less complicated way.

Sunsaru

Not everything in life has to be balanced to be fair. My brother got more of a helping hand from my mother when he bought than I did. Am I bothered? 
OP You know your children better than any of us can guess so if the legals add up then there is no reason not to.

PS I wish i got on the housing ladder when I was 22 but instead it's taken me 20+ more years.

Good luck to you and yours OP.