In recent years, rising house prices have made it difficult for many young people to take their first step onto the property ladder. According to figures from the Office for National Statistics (ONS), the average house price reached a record high of £261,000 in June 2021 – an increase of £31,000 from the previous year.
With this in mind, if you have children who are looking to buy their first home, you might be tempted to help them. However, before you do so, it’s important to think carefully about how this decision might impact your own financial wellbeing.
Read on to find out the four important questions that you need to ask yourself before becoming the Bank of Mum and Dad.
1. Is it affordable for me?
There are a variety of ways that you could raise the funds to help your children afford a mortgage deposit, such as by dipping into your pension. However, one of the main questions to ask yourself is whether you can comfortably afford to do so.
While you may instinctively want to help your children to raise money for a deposit, it’s important to consider how this could impact your standard of living.
For example, if you’re still working then you need consider the long-term financial implications of the decision. Giving too much might mean that you have to delay your retirement or could potentially cause problems when it comes to paying for later-life care.
Alternatively, if you’re retired and plan to use some of your pension, you need to ask whether the decision will impact your preferred lifestyle. If you don’t have enough wealth, you may have to settle for a less comfortable retirement than you expected.
When it comes to giving a financial gift, there are many things to consider so if you want to be able to do so with confidence, you may benefit from seeking professional advice.
2. Should I give money as a gift or a loan?
If you are able to help your loved ones financially, the second question you should ask yourself is whether you want to give money as a gift or a loan.
While it might seem unusual to loan money to a loved one in need, it isn’t uncommon. According to a study by Legal & General, only around one-third of first-time buyers said that they had been loaned the money to buy a home, rather than being gifted it.
Talking about money can often be difficult, but it’s important that both you and your child have a conversation about the aid, as well as its implications.
If you are planning to gift the money, then it’s important to discuss whether there will be any conditions, such as a guarantee that it is used solely for a mortgage deposit. Alternatively, if you’d prefer to loan the money, you may want to think about a repayment plan and whether you plan to charge them any interest.
3. Are there any tax implications that I should know about?
If you plan to help your children with a gift, then it’s important to be aware of the Inheritance Tax (IHT) implications of doing so.
As you may know, as of the 2020/21 tax year, any individual can leave up to £325,000 worth of assets to their loved ones when they pass away. Along with the new “main residence” allowance of £175,000, this means that you could have a total IHT allowance of up to £500,000.
Typically, anything above this threshold is taxed at 40%, although there can be factors which change this.
If you gift money to your children, you typically won’t have to pay tax on it immediately, but if you die within seven years of making the gift then this may be count towards the value of your estate. There is, however, a sliding scale if you pass away between three and seven years from the date of the gift.
Each tax year (6 April to 5 April) you can gift up to £3,000 tax-free per individual. This allowance can also be carried over for one year. This means that if you and your partner both have unused allowance from the previous tax year, you could gift up to £12,000 without any tax complications.
However, if you are loaning the money to your child, then the amount will typically count towards the value of your estate when it comes to working out your IHT liability. It’s also important to bear in mind that if you charge interest on the loan, you may have to pay income tax on it if it exceeds your annual Personal Savings Allowance.
4. Should I seek professional advice?
While lending or gifting money can make a significant difference to your children, it’s important to know whether it will impact your financial plan. If you aren’t careful, it could mean that you are unable to meet your financial goals.
When giving financial aid to your loved ones, it’s important to know where the money will come from, how and whether it needs to be paid back, and if it will affect your current or future standard of living. This is where seeking professional advice can help you.
Working with a financial planner can help you to understand your current financial situation and work out how a large gift or loan will impact you. This can enable you to make a properly informed decision and give you a greater sense of confidence when making the gift.
Get in touch
If you want to help a loved one to get onto the property ladder but aren’t sure how a gift will affect you, get in touch. Please email firstname.lastname@example.org or call 0115 933 8433.
The Financial Conduct Authority does not regulate tax and estate planning. Levels of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor.