Q We are first-time buyers and have a small deposit but obviously a larger one would be better. In April my dad has access to his pension and under the new rules he can take all of it in one payment (25% of it will be tax free). He has considered giving us a lump sum towards a larger deposit. What tax implications are there for him and us? I am aware of inheritance tax but are there any others?
We have also talked about him lending us a larger lump sum and us paying it back like a private mortgage, will this affect our normal mortgage and do our lenders need to be aware of this? My dad is also very close to the £16,000 savings limit for help such as housing benefit, obviously when he receives his pension this will not be the case but what happens if he was then to gift or loan the money to us, would this money still count as his savings or would it be completely transferred to us? LS
A If your father takes the whole of his pension pot as a lump sum, you are right that 25% of it will be tax free but the rest of it will be subject to income tax. If the taxable 75% of his pension pot plus his other income – but less the personal tax allowance of £10,600 (in the 2015-16 tax year) – totals more than £31,785, he’ll have to pay basic-rate tax of 20% on that amount and higher-rate tax of 40% on the amount over £31,785. So I think your father should reconsider his plans to take the whole of his pension pot all in one go to avoid paying more tax on it than he needs to and he should certainly get professional advice on the best way to draw on his pension savings.
Whatever he decides to do with his pension, if he uses some of it to give you a lump sum towards your deposit, you are right that there is a potential inheritance tax (IHT) bill if he dies within seven years of making the gift. There is no IHT bill if he is still alive seven years after making the gift. Because he’s making a gift of cash, there is no liability to capital gains tax.
If he lends you the money, there are no taxes to worry about if it’s an interest-free loan but he would have to pay income tax on any interest he charged you.
If part all or part of a deposit comes from a family member, mortgage lenders will want to know if it is a gift or a loan and it will affect how they consider your application.
There are ways that your father can use his money to help you get a mortgage without giving or lending you money. Barclays, for example, offers a Family Springboard mortgage which would help you get a 95% mortgage if you were able to put down a 5% deposit and your father could pay the equivalent of 10% of the purchase price of the property into its Helpful Start savings account and leave it untouched for at least three years. This would allow you to get the kind of mortgage rates Barclays offers to people able to put down a deposit of 15% of the value of a property. Similar arrangements are available from Family and Market Harborough building societies although these lenders expect an amount equal to 20% of the purchase price to be put in a savings account linked to the mortgage as well as a 5% cash deposit from the borrower. This does, however, mean that borrowers get access to the more competitive rates for a mortgage of 75% of the value of a property.
I’m not sure why you are worried about the £16,000 savings limit for housing benefit because to qualify for housing benefit you not only have to have savings of less than £16,000, you also have to be paying rent and be on a low income. If this applies to your father, I am struggling with the advisability of him parting with cash that he would seem to need more than you. Although to answer your last question, if he did give you money it would no longer count as part of his savings although it could if he only made a loan.
Muddled about mortgages? Concerned about conveyancing? Email your homebuying and borrowing worries to Virginia Wallis at virginia.wallis.freelance@theguardian.com
