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What are the options to help your children get on the property ladder?
The bank of mum and dad has become the phrase of a generation for parents who want to help their children get on the property ladder, in a housing market where the cost of buying your first house is at least 7.5 times a person’s yearly average earnings.
As rent prices remain high, wages stagnate and inflation rises pushing up the cost of everyday goods, it is becoming more and more difficult for those in their twenties and thirties to save up the deposit needed for a house. This is where the bank of mum and dad come in with loans or gifts of money designed to provide the helping hand their children need for their future.
As a result, many young adults have given up on the idea of ever owning their first home, research from the Resolution Foundation found that millennials will be the first generation to be financially worse off than their parents.
But if you are a parent considering providing money to your children to help them get on the property ladder, you need to think carefully about how you are going to do this. Would you gift them the money, provide them with a loan or become a shared owner of their property?
Whether you would initially prefer to loan the money or it is initially a gift, which due to circumstances out of your control now needs to be paid back to you, a loan could be a useful way of helping your children and keeping control of your savings should you need them for your future.
Keith Churchouse, chartered financial planner at Chapters Financial, said; “Lending is a good way for parents to keep some control of their cash, which is not an uncommon desire,”
However, a loan is subject to inheritance tax as it is classed as part of your estate when you die. A loan, such as this, will only become exempt from inheritance tax if you waive the debt and decide to gift the money instead. Although, it will only become fully exempt as a gift after seven years (for more information on this, read the gifts section which explains the way inheritance tax for gifts works).
If you decide to charge interest on the loan then it’s important to remember that you will be taxed on the interest which is seen as a personal income. Also, don’t forget about the loan as this is likely to lead to an inheritance tax charge on your death to the family member liable for this debt.
Lending money to family members can quickly become complicated as many people do not see the need for contracts or any other legalities. However, it is always important to be very clear about the expectations which both sides have and to think of a plan if repayments are not kept up.
It is wise to get the lending agreement drawn up in writing and make the terms of the lending clear from the start which should avoid any issues when winding up the estate. You should always take legal and financial advice when dealing with loans, even between family members, as this will help you to understand the complexities of this area.
Gifting money can be a great way of helping your children to get on the housing ladder if you don’t need the money. However, it is important to remember that a monetary gift such as this could incur a 40% inheritance tax charge if the giver of the money dies within three years of the money being given.
This is because it still counts as an asset on their estate and as a result, it is liable for tax. After three years, the tax rate goes down to 32%, after six years, it falls to 8% and once seven years has passed, inheritance tax will no longer be due.
An individual is able to gift up to £3000 in a tax year without facing a charge therefore, it may be worth giving gifts in smaller chunks rather than in one big sum.
For those who receive bonus payments or extra income, a useful exemption is gifts out of income which are classed as outside of your estate, if you can maintain your standard of living after making the gift. If you do this you should make note of the gift to prove that it was surplus to your income, this is especially important to you do this on a regular basis.
An alternative arrangement to providing money as a gift or a loan is to become a shared owner of the property. This can be a good way of not only helping your child get their first steps on the property ladder but it also allows you to potentially make a healthy profit on your investment should your child sell up and move on at a later date.
However, you should be aware that shared ownership will be regarded as a second home (if you already own a property) for tax purposes and as a result, you will be charged the higher rate of stamp duty on the purchase of the house.
You will also have to pay capital gains tax on your share of the house if it appreciates in value over the course of your shared ownership. If the property is in negative equity when sold then the money you put into the property is likely to be used to cover the debt and you will be jointly responsible for any shortfall due to the lender.
With three options in mind for helping your children to get on the property market, there are ways out there to help you assist them; the option you choose will depend entirely on your circumstances. However, before investing in a property for your children, it is worth keeping in mind these five points:
- The tax implications – All options have tax implications attached to them and you will need to keep this in mind when deciding which option is best.
- What you can afford – This is probably the most important thing to keep in mind as you should not overstretch yourself financially.
- Always obtain legal and financial advice – This is extremely important to make sure you do everything properly and you protect both parties from things such as tax penalties.
- Always make sure you are clear about your agreement – If you are loaning the money then this is extremely important, both parties know where they stand before entering into the agreement.
- Look into any alternatives – There are other alternatives out there apart from the ones mentioned above and it is worth looking into these with a financial adviser prior to making any arrangements.