As the summer draws to a close many will have turned their minds to packing children off to university or are contemplating how long those who already graduated will be back home after returning at the end of their degrees. With high rents in university towns, it may be worth considering getting your child on the property ladder early, rather than paying off someone else’s mortgage. If you are worried about 2nd property taxes, then we may have a solution.
Taxes are not the only problem, there’s the added worry your children will never be able to afford a home of their own! Also, secretly you are probably plain sick of their washing and fridge emptying abilities and need to reclaim your house. Whatever your reasons, getting your children on the property ladder can be tricky.
So, what are your options?
If it’s feasible and affordable, it would seem only logical to think about buying a house for your child to live in and pay a mortgage rather than rent.
However, buying an additional property can come with extra taxes and costs to you if this property is bought in your name. Any house in addition to your main residence would be deemed a 2nd property and be subject to increased stamp duty at the time of purchase, along with capital gains tax on the sale of this property (more on CGT later).
Unless you are in the lucky position of being able to gift your child sufficient funds to make the house purchase happen out right they will need a mortgage, but, as a student or young professional starting out in life they will not have sufficient income to furnish the repayments so you may feel a bit ‘stuck’.
What is the solution?
If you need to help them buy their first home without appearing on the deeds showing you as a legal owner; Joint Borrower, Sole Proprietor, also known as JBSP, could be the answer.
Before we get into the nitty-gritty of JBSP, what is happening in the property market?
The cost of living has increased over the past eight months due to record high inflation numbers. Consequently, this has put a squeeze on everyone’s income, including those with rentals. While the capital has experienced an increase in rent of 15.8% over the past year, outside of London we have seen an increase of approximately 11.8%. The average rent in London stands at £2,257 per month, while outside of London it is £1,126 per month1.
There is a similar picture with house purchasing. Up to the end of April 2022, we have seen the average house prices increase by approximately 12% in England 2.
Hence, getting your children into their own homes, whether rented or purchased, is becoming increasingly challenging and expensive.
How does Joint Borrower, Sole Proprietor work?
With JBSP, technically, the property is owned by your child. However, as parents, you are added to the list of those responsible for paying the mortgage. Allowing the parent/s to be added to the mortgage boosts how much money your children could borrow from the lender.
You, the parents, are NOT added to the deeds. The deeds are only in the child’s name thus retaining their first-time buyer status for a mortgage. This way, the parents can not fall into the 2nd property tax trap for capital gains and stamp duty.
Why is JBSP more beneficial than just buying a house in your own name for your child to live in?
At the point of purchase, if you buy in your own name as a 2nd property, you would pay an additional 3% tax in addition to the standard stamp duty. Assuming a purchase price of £300,000, if you bought this home for your child with a mortgage, you would pay £14,000 in stamp duty. If you took a JBSP mortgage and did not feature on the deeds while preserving your child’s first-time buyer status, there would be no stamp duty due in this example.
Below are the percentage stamp duty charges that would apply depending on the price of the property. You may need to scroll left and right if you’re viewing the table below on a small screen.
| Price of property | Standard stamp duty | Total stamp duty for purchase of 2nd property |
|---|---|---|
| up to £125,000 (£300,000 for first-time buyers | 0% | 3% |
| £125,001 – £250,000 | 2% | 5% |
| £250,000 – £925,000 | 2% | 5% |
| £925,001 – £1,500,000 | 10% | 13% |
| £1,500,001 + | 12% | 15% |
What happens when you sell the house if you have bought it in your own name?
Under current legislation, if you are noted on the deeds as the legal owner of a 2nd property, you would be liable for capital gains tax on any profit you have made minus your annual capital gains allowance (£12,300 in 2022/23). As a basic rate taxpayer, you would pay capital gains tax on the gain over and above this at 18%, and as a higher rate taxpayer, you would pay at a rate of 28%. Buying under a JBSP arrangement providing your child owns no other property, would be deemed their sole residency in the UK and, therefore, would be exempt from capital gains tax on any profit at the sale.
Any other considerations?
Don’t forget, just like any new mortgage the lender will look into the finances of all named parties and run the normal affordability assessment and credit checks, meaning not only will they consider your income but also your expenditure. As parents, you still need to show you have excess affordability over and above your own mortgage and other commitments.
You may wish to seek independent legal advice as while your name is not on the title deeds of the property you are on the mortgage. So, if other borrowers (i.e. your child) default on any mortgage payments, it may be up to you to pay the mortgage, but you will have no legal entitlement to that property.
JBSP allows you to help your children get onto the property ladder before they have a steady, sufficient income stream, such as while at university or when they first start working. Some lenders will also take into account the income from renting out additional rooms.
Joint borrower sole proprietor allows your children (and you) to stop paying those ever-increasing rental payments, allowing them to start building their own wealth through increasing property prices, as well as paying down the mortgage through monthly payments and overpayments.
This mortgage scheme is not for everyone, and not everyone has the affordability to make this happen. However, it is worth running the figures and options with your advisor to see if JBSP could be an option.
Always remember your home may be repossessed if you do not keep up repayments on your mortgage.
This article should not be interpreted as specific advice, as always we would urge you to contact one of our specialist advisers who will look at your own circumstances before advising
Have you thought about getting your child on the property ladder but needed some advice? Let us know by leaving a comment below
References:
1 Guardian Business 2022
2 ons.gov.uk