5 ways to help your children on the property ladder
The average first-time buyer is now 33 years old, according to the latest figures from the English Housing Survey. With high prices, a lack of housing stock and the financial trap of long-term rent, only 64% of households in England are owner-occupied – a figure that’s been declining since 2003.
So how can your children or grandchildren make their first property purchase? Here are our top five ways you can help.
1. Gifting or lending a deposit
According to figures from Legal and General, the Bank of Mum and Dad is expected to lend £6.3 billion in 2019, making it the 11th largest mortgage lender in the UK. In fact, nearly one in five property purchases will be helped with a financial contribution from family or friends.
If the money is a gift, mortgage lenders will typically want written confirmation that the money is not expected to be repaid. If it’s a loan they’ll want to know a repayment schedule to factor into their affordability checks.
You will also need to consider a potential Inheritance Tax liability on a gifted deposit if you die within the following seven years, unless you are making regular gifts from surplus income.
Rather than simply making an outright gift, you could make use of a Protective Gifting Trust (PGT). Using a discretionary trust structure, beneficiaries and trustees are appointed, with trustees having the flexibility to disburse income from the trust or pay-out the capital lump sum.
The primary benefit of gifting via a PGT is that the funds are immediately exempt from the beneficiaries estate for Inheritance Tax purposes. It also cannot be claimed by third parties, such as an ex-spouse during divorce, or creditors during bankruptcy.
2. Help them save
There are several tax-efficient ways you can help younger generations save towards their own deposit.
Lifetime ISAs (LISAs) were launched in 2017 and provide a 25% state-funded cash bonus each tax year on savings up to £4,000 – that’s a ‘free’ £1,000 each year. LISAs can go towards a property purchase or retirement, but to buy a home with a LISA your child must never have owned property before, anywhere in the world. As a cash-based investment they attract interest, but the rate depends on which provider your LISA is with. There are some conditions:
- you must be aged between 18 and 40 when you open a LISA;
- you must purchase a UK residential property, to live in, that costs £450,000 or less; and
- if you withdraw the cash and don’t use it for a home or retirement you will pay a penalty.
Help-to-buy ISAs are also still available but are being phased out by Government. They work in a similar way to LISAs, with the state adding 25% tax-free to whatever is in the ISA when you use it to buy a home, up to a maximum bonus of £3,000. Conditions include:
- you must be aged 16 or over and a first-time buyer;
- you can pay in up to £1,200 in the first month and £200 a month after; and
- the property must cost £250,000 or less (£450,000 in London), but you can rent it out.
The deadline for opening a Help-to-buy ISA is 30th November 2019, so you’ll need to act quickly if they appeal to you and your child.
3. Consider your mortgage options
There are a few types of mortgages available that can help give children a leg up the property ladder. Currently, the most common options include:
- Remortgage your property – and simply gift the proceeds. You’ll need to have a regular income and meet the usual credit score requirements and affordability checks.
- Guarantor mortgages – where the amount your child can borrow typically depends on your assets and income in addition to theirs. As guarantor, you will be liable for the repayments if they fail to pay, and you will often have to offer your property or savings as security against the loan. There are different types of guarantor mortgages available, with some not requiring a deposit and offering a 100% loan to value ratio.
- A joint mortgage – again, your income will be considered with your child’s, but you will usually be named on the agreement and property deeds. You’d both be liable for repayments, but you are likely to fall foul of the second home stamp duty surcharge.
- Equity release – which may not be appropriate for everyone but are growing in popularity. There are currently unprecedented levels of product choice and flexibility, and in the first six months of 2019 £1.85 billion of equity was unlocked by homeowners, according to the Equity Release Council. Equity release rates are also at an all-time low thanks to the increased competition, so depending on your circumstances, it could provide the most cost-effective way of helping your family buy their home.
4. Gift a property
If you have the means to buy your children a property outright you could gift it to them. Just like gifting cash, you’ll need to be mindful of Inheritance Tax if you die within seven years.
However, if you gift it with conditions attached, like continuing to live there or receiving rent, it could be classed as a ‘gift with reservation of benefit’. This means the property would remain part of your estate when calculating Inheritance Tax, even if you lived beyond seven years.
You would also need to be careful that the transaction is not viewed as a ‘deliberate deprivation of assets’ if you are being assessed for care costs by the local authority. If they view the gift as an intentional attempt to conceal wealth and avoid paying for care, they can reverse the ownership and utilise its value.
There can be downsides – especially if your child marries and subsequently divorces – as they may need to split the property value with their partner. There may also be a Cap.
If you’d like to discuss all the pros and cons of gifting property, please get in touch.
5. Talk to the professionals
There are alternative ways to help your child buy a home, but the suitability of any method relies entirely on your personal circumstances. As mortgage brokers and financial planners, we are here to help you make the right decision for you and your family – please do contact us if you’d like to find out more.
This article was produced by our Private Wealth team.
The Financial Conduct Authority does not regulate taxation and trust advice.
Equity release refers to home reversion plans and lifetime mortgages. Home reversion plans and lifetime mortgages are complex products. To understand the features and risks, ask for a personalised illustration. Your home or property may be repossessed if you do not keep up repayments on your mortgage. You may have to pay an early repayment charge to your existing lender if you remortgage.