How to give your children a leg-up on the housing ladder

With the cost of living rising, house prices remaining high and uncertainty in the future, young people can need a helping hand when it comes to getting started in life.

Our parents and people of previous generations were commonly able to save for a deposit to buy a home, and in many cases could secure mortgages even with relatively modest incomes.

However, this is increasingly difficult for many young people and couples in a challenging economic climate. Recent research from King’s College London found that three quarters of UK adults think buying a home is harder for young adults now, with only 11 per cent believing it is easier than it was in the past. The same poll found that 68 per cent believe it is harder for young adults to save for the future.

The research hit the headlines thanks to respondents who said “frivolous spending” on luxuries such as takeaway coffees and Netflix subscriptions was partly at fault. Young people would counter that this spending represents a drop in the ocean at a time when property prices are so high. Just over a tenth of young people believe they will never be in a position to own their own home and the average first time deposit is just over £60,000 (more than 450 years’ worth of Netflix subscriptions).

The Bank of Mum and Dad

Against this backdrop it’s no surprise that parents who have savings or assets are often the first port of call for young adults looking for help in making a start in life. According to research, almost half of first-time buyers aged under 35 got help from the “Bank of Mum and Dad” to buy their first property, with an average loan of £20,000.

It may also be that parents take a long-term view, deciding that instead of a loan, a gift now is of more help to their children than an inheritance after death. These gifts can make a huge difference, removing the pressure to pay back a loan – however, it is important to make sure the tax implications are properly thought through.

Plan carefully

If you are planning to make a cash gift to your children, or anybody else, it’s important to plan carefully.

Making gifts while you are alive can be far more tax-efficient than a legacy which attracts Inheritance Tax (IHT). Estates over £325,000, when left to anyone except a spouse, civil partner, charity, or community amateur sports club, attract IHT at 40%.

By contrast, an outright gift can attract zero tax as long as you live for seven years after you make it. During those seven years it is a ‘potentially exempt transfer’. If you die during that time period, the effect for tax purposes will depend upon the amount of the gift. If, when combined with any other gifts, it falls within your ‘nil rate band’ (currently £325,000 per person) it will use up some of that nil rate band, but no tax would be payable on the gift.

If the gift exceeded your nil rate band, your beneficiaries would be primarily liable to pay the IHT on the ‘failed’ potentially exempt transfer. “Taper relief” can help to reduce the amount of tax due on the gift – the rate drops to 32% if death happens within between three and four years after the gift, further reducing year on year to 24% (4 to 5 years), 16% (5 to 6 years), and 8% (6 to 7 years) until the seventh year when it reaches 0%.

There is a limit – known as your “gift allowance” – of £3,000 each tax year which can be gifted without it being added to your estate for tax purposes.

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Any unused amount of gift allowance in one tax year can be rolled over to the following tax year – but it must be used then and cannot be carried over any further.

This is helpful to know if you have teenage children and are planning to help them by gifting them money for a housing deposit when they are older. Planning a series of gifts each year now can help them build a pot of cash without you attracting IHT.

Small gifts of up to £250 can be made to anyone at any time without tax implications as long as they don’t go to someone who has already benefited from part (or all) of your £3,000 annual exemption.

Be aware that if your children make money from a gift – for example by investing it in shares – then they may be liable for other taxes such as Capital Gains Tax on the income.

Gifts of property

If you already own a property and are planning to give it as a gift to your adult son or daughter, be aware that the tax implications are highly complex and it is wise to seek legal advice.

A gift of property is subject to Capital Gains Tax (CGT) which must be considered where there is any gain on the gifted property. The amount depends on the amount of capital gains made and other factors such as the donor’s income and whether the donated home was the donor’s primary residence.

If you buy a property and then immediately gift it to your child then there should usually be no CGT to pay.

In consultation with a tax law specialist you may be given recommendations for other ways to make the gift tax efficiently, for example by renting the property out and gifting the post-tax rental income to your child instead.

Keep records

When making gifts during your lifetime it is essential to keep records so that your family and executors of your estate have a handle on the circumstances for tax purposes. Make a note of how much you gave, who to, and when you gave it – and share this information with anybody who needs to know.

Talk to an expert

The tax implications of gifting money, property or other assets during your lifetime can be complex – talking to a specialist now can help avoid costly mistakes later. The Thrings Inheritance and Tax team work with you to develop an in-depth understanding of your financial circumstances and deliver tailored solutions, enabling you to pass on your assets tax-efficiently.


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