10 min read

Questions to ask before helping your kids on to the property ladder

Parents will fund one in four* house purchases in the UK this year, putting it on a par with the ninth biggest lender in the mortgage market. Parents are set to lend more than £6.5bn in 2017, an average of £21,600 each, mostly to help cover the large deposits many mortgage providers now require.

Little figures stand on stacks of coins like steps leading up to a toy house.

It’s totally natural to want to help your child on to the property ladder, but there are a few questions parents need to ask first to avoid financial trouble down the line.

Can I really afford it?

Be honest with yourself about whether you can actually afford to help out. Will it mean you have to delay your retirement or eat into your pension savings? If so, these are red flags you should not ignore.

Martin Dodd, financial adviser at Midlands Investment Agency, says his clients often ask him for help on this point. “Parents are not thinking ‘should I loan the money, is it tax efficient?’, they want to help Johnny and Sally buy a house and they are saying to me ‘what can I legitimately afford to give them without causing myself hardship?’

“I have people coming to me that I do not think can afford to do it but they do want to help. I would always tell them not to if I thought they couldn’t afford it.”

Give or lend?

Parents often lend money with no real expectation of it being returned. But if you don’t want to wave goodbye to the money forever, you could draw up a contract specifying when and how it is to be paid back. You can even charge interest if you wish. Bear in mind that your child must declare any loans, even a family loan, to their mortgage lender.

If you decide to gift a sum of money to help with a house purchase, you may need to think about your inheritance tax liability, depending on the size of your estate. New rules mean a single homeowner will be caught by IHT (Inheritance Tax) above a threshold of £425,000, and £850,000 for couples. The rules are quite complex, but there can be ways to help reduce your tax liability. Seek the guidance of a financial adviser if you’re looking to reduce your tax liability.

You can gift up to £3,000 a year tax free, and you can bring forward your unused allowance from the previous year, but giving a lump sum could make it eligible for up to 40% inheritance tax liability if you die within seven years of giving it. Financial gifts to newlywed couples are exempt, as are regular gifts paid out of your income.

Mike Pendergast is an independent financial adviser at Zen Financial Service in Crewe. He advises clients on how best to help their adult children buy their first homes, and he expects to help his own twenty-somethings when the time comes for them to buy.

“I’ve got two kids in their 20s and they are finding it hard. Property prices are going up but lenders’ income multiples are not, and people need a bigger deposit now.

“My daughter wants to move to Manchester to do a teacher training course, she will probably rent with friends. If I was going to help her out with money for a deposit, I would gift it directly.

“For most parents, if they have £5,000 to £10,000, it would be a question of just transferring the money over if they have got it. But if parents have assets that take them over the inheritance tax threshold and they die within seven years of gifting it, then IHT would be a consideration.”

How should I fund it?

Ideally you would have the money stashed away as cash in the highest interest-bearing account you can find, or in a tax-exempt savings plan. You may have funds invested in an ISA which you plan to cash in. If you don’t have cash to hand, there are ways to leverage the equity you have in your own home. You could sell your house and downsize to free up some cash, remortgage (at a lower interest rate if you can), take out a secured loan against your house, or use an equity release scheme.

Equity release through a product like a lifetime mortgage allows homeowners (often having to be over 55 years of age) to borrow money against the value of their property, and opt to make no payments on it during their lifetime. Instead, the capital and interest can be rolled up and paid back from the sale of the home after both parents die or go into residential care. This should not be your first port of call, however, as it can be an expensive way to borrow and will affect what you can leave your children as an inheritance.

Martin Dodd says he would urge clients to think very carefully about equity release, and discuss it as a family because it has long-term implications. “It means sitting everyone around the table with a least one financial adviser,” he says. “With lifetime mortgages, people often don’t know what they are getting themselves into. Adult children may lose both their parents and then find half the value of their property is going to an equity release company. So the decision has to involve the whole family or it can lead to upset down the line.”

Written by Hannah Smith – Financial Journalist

Note: Whilst we take care to ensure Talking Finance content is accurate at the time of publication, individual circumstances can differ so please don’t rely on it when making financial decisions.

*Source: https://www.lovemoney.com/guides/49829/bank-of-mum-and-dad-how-to-help-your-children-buy-a-home-tax-implications-iht