Rising costs continue to make it difficult for first-time buyers to get on the property ladder. Rachel Lacey explains the best way for parents to help out.
In 2021, the Bank of Mum and Dad helped fund almost half (46%) of all first-time buyer mortgaged sales, according to estate agent Savills. This year, that figure is predicted to rise to 61%, meaning only two in five first-time buyers will manage that elusive first step on the property ladder without family support.
House prices are falling. In June, the average house was worth just under £286,000, down 2.6% over the last 12 months, according to Halifax figures. But despite this, life for first-time buyers isn’t getting any easier.
At the time of writing, the average interest rate on a two-year fixed rate mortgage reached a 15-year high of 6.7%, up from a low of 2% in 2020, according to Moneyfacts.
Until inflation eases and mortgage rates improve significantly, first-time buyer affordability is going to continue to be a challenge, and the number of withdrawals from the Bank of Mum and Dad is only going to grow.
For some parents, helping their children out with a house deposit was always part of the financial plan, but for plenty of others, it’s something they have only started to consider more recently.
Whatever camp you’re in, if you’re thinking about helping your child buy their own home, it’s important to do so as tax-efficiently as possible. In some cases, giving your child a financial gift could help you mitigate a tax liability, but without proper consideration, it could also land you with a hefty bill from HMRC.
Making a gift
The most common way of helping a child (or grandchild) out is to simply give them money so they can put down a bigger deposit.
Peter Gettins, product manager at L&C Mortgages, explains: “This could enable your child to access better rates or bring the mortgage required down to a level they can afford.”
But as Robert Barwise-Carr, tax director at Mazars, says, anyone making a gift must think about the potential tax consequences: “If parents have the cash available then they may be prepared to make a cash gift to their children to help them get on the property ladder. There would be no immediate tax consequences of making the gift, however, should the parents fail to survive for seven years, then the recipient child could be landed with an inheritance tax (IHT) liability of up to 40%.”
Viewed from a different perspective though, if you are confident of living seven years, giving a substantial gift, like a house deposit, could help reduce the amount of IHT your loved ones eventually pay after you die.
But it’s not just IHT to consider.
Where parents are cashing in investments, care needs to be taken with capital gains tax (CGT). Barwise-Carr adds: “If parents are required to dispose of assets like stocks and shares, investment property and so on, to free up cash to make the gift, then CGT may be payable at up to 28% on any capital gains in excess of the annual exemption.”
The annual exemption for CGT was cut in April this year from £12,000 to £6,000 and will fall again in 2024-25 to just £3,000.
This means that increasingly parents may need to plan ahead and realise investments over a number of tax years.
Importantly though, CGT won’t be payable for parents selling shares within an ISA as all proceeds will be paid tax free.
From age 55 (or 57 from 2028) it’s also possible to take cash out of your pension. But while this might seem like a convenient source of cash, you could be stung with a big income tax bill.
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While you can take up to 25% of your pension tax free (your tax-free cash or pension commencement lump sum), this can only happen at the point you crystallise your pension by moving into drawdown or buying an annuity.
If you withdraw a lump sum before that point, only the first 25% of your withdrawal will be paid tax free (known as an uncrystallised pension fund lump sum or UPFLS), the remainder will be added to your income for the year and taxed at your marginal rate. In some cases, it could push you into a higher-rate tax bracket.
If you are already in drawdown – and have taken your tax-free cash – your withdrawal will also be added to your income for the year and taxed accordingly.
Offering a loan
Another option is to lend your children the money for a deposit. However, as Gettins explains, this can complicate matters.
“Lenders prefer deposit help to be an outright gift because it means, first, that the parent can't make any claim over the property, and second that the child is not building a repayment commitment that could be deducted from their income.”
He adds: “That's not to say there can't be an informal agreement between child and parent to repay the funds in due course but 'informal' is the operative word.”
The tax position will also be different if you lend money for a deposit rather than gift it.
Barwise-Carr says: “The value of the loan, less any repayments made, would remain as an asset of the parent and therefore would be in their estate for inheritance tax purposes.
“Any interest payable on the loan would be subject to income tax in the hands of the parents at up to 45% depending on their other income and allowances.”
Joining forces to buy a property is another option, especially if mortgage affordability is a challenge. This is because lenders will take your income into account too. It can also be helpful to parents who do not want to lose access to a lump sum. But again, it isn’t straightforward from a tax point of view, as it will be treated as a second home for the parents.
“Care needs to be taken here as there could be additional stamp duty payable where the property becomes a second property for the parent,” says Barwise-Carr. “And, although individuals tend not to pay CGT on the sale of their main residence, the parents could end up with a tax bill if the property they share with their child is ever sold in the future.”
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But Peter Gettins points out that lenders do have a solution to this problem, in the form of joint borrower/sole proprietor mortgage arrangements. “Here the parent sits jointly on the mortgage, but has no share in the property, which is owned purely by the child.”
He adds: “This is helpful because it means the parents do not incur the stamp duty additional property premium and, because the parent has no interest in the property, there's no CGT liability when it's sold - both could be potential issues if they simply bought the property jointly with their child.”
But whatever agreements the family come to around who pays the mortgage each month, Gittins says it’s important to be aware that you will be liable for it all, if the child cannot pay it. “This is why it’s important to get separate independent legal advice and in fact lenders will normally make that a requirement of the mortgage.”
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