Lifetime Gift: How Can I Help My Kids Buy a Home?
How to support your children in the purchase of their first home? The tax and estate planning team covers the options available below.
The Bank of Mum and Dad supported more than half of first-time buyers under 35 in 2020 and is the sixth largest lender in the UK.
The average amount provided by Mum and Dad’s Bank in 2020 was around £ 20,000. As a first step, you need to make sure that you can afford to offer this level of financial support to your children and that you will not need the funds to supplement your retirement income.
If you’re happy, there are three main ways for parents to provide their kids with funds to help them buy a home: outright gifts, trusts, and loans.
The main tax to be taken into account when making a donation is the inheritance tax (IHT). You can donate up to £ 3,000 per year tax free (£ 6,000 if you have not donated in the previous fiscal year). You can also make a tax-free gift to a child of up to £ 5,000 in the year of their marriage.
Larger gifts will be “potentially exempt transfers”, commonly referred to as “seven year rule” gifts. If you survive the donation for seven years it will no longer count towards the IHT, but if you die within seven years the donation will be taxable at 40% (potential tax decreases after three years).
You must formally document any substantial donation in a letter or deed of gift so that there is a record for future reference (a mortgage company may also require proof of the donation). If your child will be purchasing the property with a partner, you may also want to consider a cohabitation agreement to determine how the property will be divided if their relationship ends.
For added security, you may want to put the money in a trust (of which you can be the trustees). The main benefit of trusts these days is asset protection rather than tax mitigation. So a trust can be particularly useful if you have concerns about how your children might handle the money if it is not immediately invested in a house. Provided you do not put more than your tax-free allowance for IHT, or “zero rate band” (currently £ 325,000 each) in trust, there will be no immediate implications for IHT other than the start of the seven-year clock. run to withdraw funds from your estates. As a trustee, you can continue to control the funds until your children are ready to buy a property.
The taxation of trusts is a complex area and there will be administration and set-up costs to consider. We always suggest that you take legal advice before embarking on this path.
An alternative might be to lend the money to your children. It won’t lower your IHT bill (as the loan will be more of an asset in your estates) but offers a bit more control than an outright gift. You should be aware that a loaned deposit may restrict the availability of certain mortgages.
If you later choose to forgo the loan repayment, you will donate the outstanding balance at that time, which will be subject to the seven year rule for IHT. As with gifts, any loan must be formally documented.
Other ways to help
1. Specialty mortgage products
Although not common, some mortgage products can be useful, although they are not without drawbacks.
Family Matching Mortgages help offset parents’ savings against your child’s mortgage debt, reducing their interest payments and making the mortgage more affordable for them. The downside is that you will lose access to your savings and will not earn interest while the arrangement continues.
Guaranteed mortgages are another option that allows parents to guarantee all of their child’s mortgage debt, by offering their own savings or their home as security for their child’s mortgage payments.
2. Buy together with your child
You can also jointly buy and / or take out a joint mortgage with your child so that your combined income allows them to access a larger loan, although you will also be responsible for the repayments.
However, this has potentially significant tax drawbacks. If you are named as the purchaser and already own a property, you and your children will almost certainly have to pay an additional 3% stamp duty. You may also be liable for capital gains tax on your share when the property is sold.