Help Your Children Buy a Home and Cut That Inheritance Bill In The Process!
As I started to write this, I noticed something interesting (interesting to me anyway). It is exactly 28 years to the day since I bought my first home. I was 21 years old and I didn’t really know what I was doing. All I knew was I was due to get married – that’s a whole different story – and I needed to buy a home. The price of my 3-bed semi-detached house just a stone’s throw from my office - £97,500. My first mortgage - £70,000! How could I ever dream of repaying that!
Of course, I never did – that mortgage would have long since been paid off if only I hadn’t moved house (4 times), gotten divorced, remarried and had kids! That amount of life experience (in one so young still!) brings a certain perspective in particular to the question – how will our children ever manage to get on the property ladder and buy their own homes?
We can reflect on the fact that my parents paid £6,000 for their first home and everyone told them they were mad. Or the fact that I know people who have purchased cars and jewellery that cost more than my first home but when I can check to see that my own modest starter house recently changed hands for more than £500,000, it’s a question that even historically low-interest rates, longer work expectancy and the introduction of the 40-year mortgage can’t completely answer on their own.
More and more frequently it is “the bank of mum and dad” that children turn to. The generation that has benefited from the kind of house price inflation alluded to above is increasingly often using a small amount of that accumulated wealth to help their children with their own property aspirations. For those lucky ones that can do this, there are as always, some tax planning issues to consider.
Most people know that inheritance tax is due at a rate of 40% on taxable assets held at death over and above the nil rate band (currently £325,000). For some people, there is some additional relief available against your home and of course for married couples, the chance to double the allowance across their joint assets to £650,000. Nevertheless, with the value of homes continuing to race away whilst the nil rate band remains static, more and more families face the prospect of paying a significant tax bill on death.
There is a whole range of planning that families can undertake to minimise this exposure and the top of the list for most of them is to make lifetime gifts of surplus assets to beneficiaries. Generally, those gifts escape inheritance tax completely once the donor survives 7 years from the date of the gift.
At this point I should give a huge health warning – this is generic advice and should not be taken out of the context of wider considerations including the possibility of capital gains tax becoming due on gifts, non-financial and family bloodline issues and the need to retain sufficient capital into retirement amongst many others. You should always seek advice before undertaking inheritance tax planning.
Notwithstanding that, cash gifts by parents (or grandparents) to enable children to buy homes have the capacity for a double win. Not only do you get the satisfaction of helping but assuming you survive at least 3 years, there is a reduction in the exposure to tax on death. Over the intervening period to year 7 that reduction increases incrementally.
Who knows what the future holds...
Maybe our children will see the benefit of the same house price inflation that our generation did. Certainly, our parents never foresaw that we would (like them) have this problem. I always tell my children that they are lucky to be alive right now – between the rapid and continuing technological, medical and societal advances they are likely to live longer, happier, more productive, more fulfilled lives with endless opportunities than any generation before them. As long as we find them somewhere to live first!