Lending the Money

This seems like an easy option, but it may not be! Firstly, one has to ask the question of whether the loan from the parents is to be by way of a mortgage or not. If by mortgage, this would normally be a second mortgage to 'top up' the first mortgage from a bank or building society. If so, the first lender has to agree to it and the charge must be registered to be fully effective. Also, the repayment terms (if any) must be agreed. On the plus side, if the loan is by way of mortgage and is made to a child whose relationship breaks up or your child gets into financial trouble, it is likely to be recoverable. If a loan is made on which interest is payable, this will be taxable on receipt. Also, any loan will remain an asset of your estate and will not therefore produce any saving of Inheritance Tax (IHT).

A gift of money will reduce your estate for IHT purposes by the amount of the gift, assuming you live seven years. However, once money is gifted, it is gone for good, no matter what happens.

One possible method is to join in the purchase, by buying a percentage of the property. This will guarantee that you continue to own a part of the asset. In practice, this can create complications as it will be almost impossible to sell the property without your agreement, you will need to make arrangements to ensure that you avoid liability for the expenses of the property and, if the property is sold at a gain, you may well have a Capital Gains Tax liability at an unexpected time. The need to provide for tax on a gain might mean you find 'rolling over' your loan into a new, more expensive property impossible to do - an often unanticipated problem for people preparing the budgets for their move. Make sure also that life assurance arrangements are in place - otherwise, in the unlikely event that your child were to pre-decease you, you might have to assume responsibility for the entire mortgage.

Guaranteeing payment of a proportion of the loan can often be a good compromise. The liability is limited to the amount of the guarantee and also, as the sum outstanding falls, the liability under the guarantee can often be reduced (although in many cases this will not occur until the sum due becomes less than the sum guaranteed). There are various protections which can be built into these arrangements if required.

One arrangement which can be negotiated is for the parents to make a deposit with the lender and for the notional interest to be credited against the mortgage account. This is very advantageous where the depositor is a higher-rate taxpayer as the interest foregone would carry 40 per cent tax, whereas there is normally no tax relief on mortgage payments for the borrower. Such arrangements do require the money to be left on deposit for an agreed - and usually lengthy - period.