Parents trying to help their children get a foot on the property ladder could be penalised through tax rule changes.
The 3% levy on stamp duty, aimed at buy-to-let investors which came into law at the beginning of the month, actually affects anyone with two homes or more.
If you already own a property and you buy another one you will now pay an extra 3% on top of your stamp duty bill.
Unintended consequences
The new law has a hefty sting in its tail which could mean it does the exact opposite of what it is meant to do.
Chancellor George Osborne brought in the additional tax charge to try to counteract the problem of buy-to-let investors buying up all the starter homes in the country, leaving it increasingly difficult for first-time buyers to get on the property ladder.
The problem is many first-time buyers get help from their parents in order to make the huge leap to the bottom rung of the property ladder. The new tax rule could hit them too.
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Potential costs
The average salary is £27,000, but the average house now costs £284,000, according to the Office for National Statistics.
That means a single person earning the average salary needs a £176,000 deposit to buy their first home, the average couple needs £68,000.
In order to help with the affordability problem some parents give their children a helping hand with their deposit. Not everyone can afford to do that so another way parents help is by going in on a joint mortgage.
But, if you already own your own home and you go in on a joint mortgage for your child’s home the 3% levy would now apply to the whole purchase price. On the average home that would add almost £10,000 to the tax bill.
At present there is very little you can do to avoid this problem, although it can be done. A handful of lenders have a solution.
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Setback for first-timers
“Some lenders such as Barclays and Metro already have a way to avoid this by allowing the parent to be joint on the mortgage but not on the property title,” says Peter Gettins, a product manager at mortgage broker London & Country Mortgages.
This is known as getting a mortgage on a ‘sole proprietor, joint borrower’ basis, but very few lenders allow it.
This is a setback for first-time buyers already struggling to afford to buy a home.
If you need your parent’s help on the mortgage the whole cost of your purchase will go up by thousands of pounds.
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