We all want to help our children to be better off than ourselves, and we work hard to support our families while we’re alive and after we’re gone – one of the reasons why word that the government was considering amendments to its Inheritance Tax (IHT) regulations was met with such joy from most corners. But a recent phenomenon is shifting the schedule a little because property prices, now at record highs once again, are forcing parents to give up large portions of their savings much sooner than they may have ideally wanted to.
The latest figures from Land Registry shows that the property market is booming once again, with over 74,000 properties sold a month at an average house price of £189,901 in England and Wales, up 6.7% on last year’s figures. Even in the ‘bust’ years of post-2008, Britain’s first-time buyers found it incredibly difficult to afford a home of their own, but as prices have started to rise with new vigour, many have watched their chances of buying fade into the distance.
Enter the ‘Bank of Mum and Dad’ to save the day. Legal & General believe this funding source could well be one of the biggest in the country, contributing an expected £5bn to help their sons and daughters to afford the massive deposits they would now need to come up with to buy their first homes. On average, they will fork out £17,500 to help fund 300,000 property purchases this year alone. Happy kids, but what about the huge dent left in mum and dad’s savings that could have gone towards looking after them in their old age; will this mean more parents relying on their kids for financial help in years to come? Also, is this really good for the market, because the forces of demand and supply help to determine property prices and if demand is being artificially bolstered by mum and dad’s pounds, then prices are being kept artificially high also.
But, assuming that you have money to spare, and you want to use it to help your children to buy their first property, how do you go about doing this without coming under the watchful eye of the taxman?
There are two payment types to consider:
Inheritance tax (IHT)
This has long been a worry for parents. The widely held belief is that IHT will steal away a large percentage of the value of the estate that you have worked long and hard to build up to pass on to your kids, leaving them with scraps. The reality is quite different. According to the Office for Budget Responsibility, only 8% of estates will pay any IHT at all in 2016/17 and that’s because this tax only comes into effect when the estate is worth more than £325,000. With property prices rising, more and more people will come into this tax paying band, but changes are afoot, and as of April 2017 the government will be introducing a Transferable Main Residence Allowance which adds a further £100,000 to this threshold, rising to £175,000 by 2020/21. Calls have come for an abolition of IHT in its entirety, but that’s quite unlikely.
If you don’t want to wait until you’re gone to give your children the home they so desperately desire, then you can simply unlock your savings and give them the money now – but there are strings attached to this which you should be aware of. Any large sum (£3,000+) given by a parent to their child must be ‘gifted’, i.e. the parent must get no financial benefit from the sum given. Mortgage lenders will need to see a letter from your solicitor ratifying this. So don’t expect any interest on your money or a share in the property to be paid out on its sale, or even your money back again.
Attempts to circumvent correct practices when it comes to gifted sums could well result in mortgage applications being rejected – and remember that these sums are taxable under IHT should you die within seven years of gifting the money and your estate is liable for IHT, and that they would be repayable if you become bankrupt.
It should be simpler, but unfortunately it’s a complicated arena to lend your children money. Then again, that could well be a positive thing in many circumstances!
BBC Business. 2016. Bank of Mum and Dad. [ONLINE] Available at: http://www.bbc.co.uk/news/business-36181318. [Accessed 10 May 2016].
BBC Business. 2016. How Does Inheritance Tax Work?. [ONLINE] Available at: http://www.bbc.co.uk/news/business-36014533. [Accessed 10 May 2016].
BBC Business. 2016. Bank Of Mum And Dad Will Only Grow. [ONLINE] Available at: http://www.bbc.co.uk/news/business-36190246. [Accessed 10 May 2016].
Joe Cunningham. 2015. Buying a house with help from your parents. [ONLINE] Available at: http://www.lawplainandsimple.com/legal-guides/article/buying-a-house-with-help-from-your-parents. [Accessed 10 May 2016].
Land Registry. 2016. Land Registry House Price Index. [ONLINE] Available at: https://www.gov.uk. [Accessed 10 May 2016].