With climbing house prices and more stringent mortgage criteria, it’s no wonder that more children than ever before are having to rely on the bank of Mum and Dad – or the bank of Granddad and Grandma. According to the Social Mobility Commission, over 30% of first time buyers are dependent on gifts from parents or grandparents to fund their purchase – a 10% increase on 2010. The Commission predicts that by 2019, this figure will have increased to 40%. A further 12% of those moving home also depend on family support to make their move possible.
The Halifax records the average deposit for a first time buyer at £32,321 – although those buying in London will pay closer to £100,445, and those settling in the South East will need to find £47,472. But although it may be a difficult step, moving from rented accommodation to ownership makes financial sense for many. According to the Halifax, those who successfully make the switch will be better off by £651 a year, on average.
If you’re planning on helping your child or grandchild to get a foot on the housing ladder, there are a few considerations that you need to be aware of.
Gift or loan?
With unrealistic deposits blocking many from making the step to home ownership, many parents and grandparents consider using their savings to help. The first question, therefore, is whether to give an all-out gift or whether to make a loan. Conscious of the help that first time buyers often need, mortgage lenders will often require a deposit to be a non-refundable gift and will require written confirmation of the same before they will advance the mortgage monies. This is not the case for all – Santander, for example, will accept a deposit that is a loan but will consider the impact of repayments when making an affordability calculation. Consequently, the applicant may be offered a smaller loan.
Although gifting the deposit to your child may seem like the only solution, this should not be taken lightly. Parents or grandparents need to do a cash flow forecast for their lifetime – to ensure they can afford both the general expenses of retirement and any unforeseen expenses, such as care fees.
Gifts and future care fees
If you have more than £23,250 in savings, you will be expected to fund the cost of any care you need in the future yourself. The Local Authority will make a contribution if your savings are between £14,250 and £23,250, or will pay the full costs if your savings fall below the £14,250 threshold.
Note that if it is reasonably foreseeable that you or your spouse/civil partner might require care in the future and you make a substantial gift to your children, the Local Authority may regard this as ‘deliberate deprivation’ when performing a means test for care fees later down the line. There is no time limit on how far back they can look at gifts. You will need to be able to argue that there was another good reason for you to make the gift (i.e. it was not simply made to avoid paying care fees in the future). Keeping written records of your gift and the reason for making your gift will be helpful here.
Gifts and inheritance tax
Another issue to be aware of is that if you gift a cash sum to your child and then die within 7 years, the value of the deposit will be considered when calculating inheritance tax on your estate. The rate of inheritance tax is tapered so the amount payable will depend on the total value of your estate and how long you survived for after making the gift.
The inheritance tax liability on the gift actually rests with the person who receives it – so your child will have to pay any tax due. However, you can avoid this by specifying in your Will that any inheritance tax is to be paid from your estate.
If you give the money but attach conditions to it, or you reserve a benefit from it, it will not be classed as a gift. For example, if you give your child £20,000 for their deposit then take out a charge on their house, this will be a loan rather than a gift.
It will be helpful for your executors if you keep records of how much you give away, who you give it to and whether it is an all-out-gift or a loan.
Alternatives to gifting
Rather than gift money that you may need later in life, an alternative is to take out a ‘Family’ or ‘Springboard’ mortgage. Some of these products allow you to deposit savings that act a security for the mortgage. The savings are repaid to you with interest, provided that your child does not default. Remember that for this type of product, your savings will be at risk – so you should not deposit money that you could not afford to lose. Other products allow you to use your savings to offset the outstanding balance, reducing the amount of interest your child pays. Family mortgage products include Barclays’ Family Springboard Mortgage, Yorkshire Building Society’s Offset Plus Mortgage and Nationwide’s Family Deposit Mortgage.
A further option is to join yourself on the mortgage with your child. Some lenders offer joint-mortgage single-owner products which mean that the parent’s income can help boost the amount the child will be advanced for their purchase but the parent’s name does not appear on the title deeds. The advantage of this is that, even if the parent is a homeowner, the property purchase will not attract the higher rate of stamp duty attached to second home purchases.
One final option worth considering is to set up a trust. Rather than all-out gifting the deposit to your child, you would place the money in trust for the benefit of your child. The trust would then loan the money to the child for their deposit, to be used for the property purchase. This has a number of benefits – for example (subject to conditions being specified when forming the trust) as the trust money does not belong to the child absolutely, it will not form part of a divorce settlement – and creditors cannot touch it if your child gets into financial difficulty.
If you would like advice about helping your child to purchase their first home, please get in touch with our property team.