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

OneFamily research shows that over half of first-time buyers will be financially supported by other family members when getting on the property ladder, and the London School of Economics reporting that the median parental contribution is now an average of some £30,000. The vast majority of this was given as a gift (77%) with under a quarter considering it a loan.

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.

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Can I really afford it?

There has been a lot written about the younger generations finances and if it is harder than ever to get on the property ladder, so it is no surprise that many parents will be asking themselves what they can do to help, especially as many may feel they had it easier when they were first buying a home.

However, be honest with yourself about whether you can 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.

Think about your total yearly costs by using a budgeting calculator, and consider your own circumstances in an emergency – for example, if you had a significant expense such as a new boiler or car, would you be left short?

If you feel expert advice would be helpful consider speaking to a financial adviser who can talk you through different options. Otherwise the government backed The Money Advice Service website offers impartial information.

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 could 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 grant 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.

What and how much you wish to give your children or other members of your family is completely up to you.

But to ensure that it’s tax-free, it’s important to plan when to make that gift.

Simply put, so long as you live more than seven years from when you make this gift, your children or family won’t have to pay inheritance tax on your gift when you die.

However, any income made from this gift could have tax implications for the beneficiary, for example, capital gains tax.

But if you unfortunately don’t live more than seven years after you’ve made the gift, they might have to pay inheritance tax.

When the gift is first made it is called a potentially exempt transfer, as, assuming you live for a further seven years, there will not be any IHT due on it. If you die within seven years, it’s called a chargeable transfer.

Each tax year, you can give away £3,000 worth of gifts tax-free. You can also give away wedding or civil partnership gifts up to £1,000 per person (£2,500 for a grandchild and £5,000 for a child).

There’s normally no inheritance tax to pay if the value of your estate is below the £325,000 threshold. Anything above this will potentially be subject to the standard inheritance tax rate of 40%, which is charged on the part of the estate that’s above the threshold.

The rules can be quite complex, but there are ways of reducing your liability. Seek the guidance of a financial adviser if you need help.

How should I fund it?

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.

OneFamily Advice offers advice on Lifetime Mortgages. To find out more watch this short video full of information from our two of our own financial advisers about how taking out a Lifetime Mortgage can be used to help your kids onto the housing ladder.

Written by Hannah Smith - Financial Journalist

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

*Sources:
https://www.moneyadviceservice.org.uk/en/articles/gifts-and-exemptions-from-inheritance-tax#how-much-can-i-give-to-my-children-and-family-tax-free
https://www.gov.uk/valuing-estate-of-someone-who-died

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