Rising property prices relative to incomes have made it increasingly hard for young adults to raise a deposit for their first home. Unsurprisingly, research shows that the Bank of Mum and Dad continues to be a major lender, supporting more people than ever.
It’s estimated* that 27% of all buyers in 2018 received help from friends or family, up from 25% in 2017. Offering a helping hand If you decide you want to help a family member afford a major purchase such as a home, you need to go about it in the right way. It’s important to ensure that you aren’t prejudicing your own financial security by giving or lending the money. Putting your interests first isn’t selfish, it’s common sense. You will need to decide whether the money will be a loan or a gift, and you may need to consider getting advice on the tax consequences.
Giving money away can have Inheritance Tax implications; a lump sum would be a potentially exempt transfer, as long as you survived seven years after making the gift. If you charge interest on a loan you make, the interest is liable for income tax. If you lend the money, it’s important to put the details in writing, so there can be no disagreement regarding the terms at a later date. It also makes sense to draw up a schedule of repayments, or stipulate a trigger event, which could be when the property is sold. Mortgage and pension options Some parents become guarantors for their child’s mortgage, either by depositing cash or using their own home as security, or they can enter into a joint mortgage with their child. Others choose to gift part of their pension tax-free lump sum on retirement. With property prices in many areas of the country having risen substantially over the last few years, many older home owners are choosing to release some of the equity they have built up in their property. The cash raised through equity release can be used by parents to give their children an early inheritance and help with the purchase of their own home. Interest on the sum raised is often allowed to accumulate, which may significantly reduce the amount inherited later.
If you’re considering providing financial help to family members, it’s a good idea to seek financial advice, so that the financial needs of all the parties involved are fully considered in finding the right solution.
*Legal & General, 2018
This article is taken from our quarterly magazine ‘Essentially Mortgages’, issue 12, 2nd quarter, 2019.
It is important to take professional advice before making any decision relating to your personal finances. Information within this article is based on our current understanding and can be subject to change without notice and the accuracy and completeness of the information cannot be guaranteed. It does not provide individual tailored investment advice and is for guidance only. Some rules may vary in different parts of the UK.