Parents putting their name on a mortgage to help their children buy a house are set to be stung by the 3 per cent Stamp Duty Land Tax (‘stamp duty’) penalty aimed largely at buy-to-let landlords.
The change to stamp duty announced in the 2015 Autumn Statement – which means an extra 3 per cent is paid in addition to the normal rate of stamp duty that would be payable – is set to hit untargeted groups of homebuyers, including buyers who need their parents help to get a mortgage.
The Autumn Statement proved to be problematic for property investors or those looking to buy a second home, as it was announced that anyone who buys additional residential property will have to pay an extra three percentage points in stamp duty from April 2016.
The policy aims to relieve the housing shortage, by dis-incentivising buy-to-let landlords and giving first time buyers a better chance of buying.
In the past, parents would have acted as guarantors and not become part owners of a property. In this situation the buyer would not pay the extra stamp duty, as it wouldn’t count as the parents buying a second home.
However, guarantor mortgages are now few and far between, with many parents instead taking out a joint mortgage with their child to increase the range of mortgage options available. This is often necessary as, even with a large deposit saved, first time buyers often don’t have the salary to support a large mortgage.
As part of this, most lenders require parents to put their name on the title deeds, which makes them liable to pay the additional stamp duty if they own a home themselves already. On a £300,000 property that would equate to an extra cost of £9,000.
However, those who simply want to give their children money towards a house will not invoke the extra stamp duty penalty.
Effectively that means wealthy parents with spare cash will still be free to help their children on to the property ladder, whereas those with less cash wealth who already have limited options will face an additional cost.
In response to the inadvertent impact of the stamp duty increase on those trying to help out their children, a spokesman for the Treasury commented: “We are currently consulting the public on how best to apply changes to stamp duty to ensure they work fairly and effectively.”
Nicola Tubbs, an Associate Executive with Palmers, said: “The outcome of this Government consultation has yet to be announced so it remains to be seen what provision, if any, will be made for families wishing to help first time buyers in this way.
“In the meantime, for those looking for alternatives, a family deposit (or family guarantee) mortgage is another option to consider where the stamp duty increase doesn’t apply.
“These involve a family member depositing cash in a special savings account to be held for a fixed period as security against the mortgage. The money still earns interest, and the mortgage rate is fixed for that period. If the borrower defaults, the money will then be deducted from the savings account. All lenders have different criteria so it is worth shopping around.”
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