The over 50s have supported younger generations with £8.2 billion of gifts and loans since the start of the pandemic*. A large proportion of this has gone into property, with at least 56% of first-time buyers receiving help from the Bank of Mum and Dad**.
David Forsdyke, our Later Life Finance expert, says: “It’s great to see the Baby Boomer generation, who now hold the majority of property wealth in the UK, redistributing their wealth and helping younger family members onto the property ladder. However, gifting money to help with purchasing a home is not as simple as it might seem. It needs to be done with an awareness of tax implications and some sensible thought”. Below, David outlines some of the simple steps you can take to protect your gifts.
Inheritance Tax
You can give away up to £3,000 each year tax free, but anything above this could be subject to Inheritance Tax (IHT) if you pass away in the following seven years. If you’re helping children or grandchildren with a house purchase, you may be giving them a lot more than £3,000, so it is sensible to consider the tax implications. If there is a potential IHT liability you can take out life cover for the next seven years in order to cover the tax bill. This is often known as a ‘gift inter vivos’ policy.
If you have enough equity in your home, borrowing money in order to gift it to your children and grandchildren can actually have some tax advantages and can create more wealth for your family in the long term. We discuss this in greater detail in our first quarter Later Life Finance report.
Gifts without reservation
When assisting first-time buyers, or gifting to family to help them on to the property ladder, any financial gifts must be made without any reservation or liability to be repaid. If you don’t make it clear it is a gift, mortgage lenders will view this as a debt and this could hinder the mortgage your children or grandchildren are trying to take out. The most sensible way to do this is to put it in writing to the recipient that the money is a gift and does not need to be repaid. You might also want to keep a record of such gifts with your Will, so the executor is aware of it when the time comes.
Tenants in common
Our older clients are often helping a first-time buyer who is entering into a purchase with their partner. This puts the value of the gift at risk if the relationship breaks down, because under joint ownership the value of the property, or any remaining equity in it after a mortgage is paid back, would normally be split 50/50 if they separate. If they enter into the purchase as tenants in common, they can both protect their ‘share’ in line with any gifts made by parents or grandparents.
For example, your son wants to buy a £500,000 property with his girlfriend, and you gift him £100,000 (20%) towards the purchase. His girlfriend contributes 5%, so between them they have a 25% deposit, and they take out a joint mortgage for the remaining 75%. Under tenants in common, your son should own 80% of the property and his girlfriend 20%, as this is in line with the share of the deposit each has contributed. This means if they do split up and the mortgage is redeemed, your son would get back the 20% you helped him buy, plus or minus any growth/decline in value, and his girlfriend would get back her 5%.
If you would like to know more about helping your family purchase property, protecting your gift with life cover, or taking out a lifetime mortgage, get in touch with the Knight Frank Finance team by email, or call David directly on 01483 947764.
* Onefamily 24/05/2021
** Legal and General 12/10/2020