If you’re thinking of leaving a gift to your grandchildren in your Will, it might be time to reevaluate your goals. With more young people than ever before struggling to get a foot on the housing ladder, an early gift from a grandparent could help your grandchild become a homeowner – and save on inheritance tax too.
Amongst young people, home ownership has fallen by more than half. Just 31% of 25 to 29 year olds own a home – compared to 63% in 1990. Over 30% of those who do find their way onto the housing ladder do so because of help from their parents or grandparents. The Social Mobility Commission reports that this is an increase from 20% in 2010. However, home ownership tends to be cheaper than renting – offering savings of £651 a year on average.
Young people may have the lowest mortgage deals in history available to them but soaring rents, mounting student debt and climbing house prices has made it impossible for many to take that first leap into property ownership. Where a graduate earns more than £21,000, they will lose 20% in basic rate tax, 12% in National Insurance contributions and 9% in student loan repayments – making a total of 41% deductions before they have even paid their rent. Saving is simply not an option.
Grandparents are in an excellent position to help grandchildren out of the rental trap. Around 4.5 million people aged 65+ own their own home that they already intend to pass on to the younger generation in time, with a combined wealth of £1.07 trillion in property. Almost 40% of this group are concerned about their grandchildren’s financial future. Not only would a gift help their grandchild now, but it can also be an efficient way of saving tax.
Currently, everyone has a £325,000 inheritance tax allowance. Amounts over this figure are subject to a hefty 40% inheritance tax charge. The new Residence Nil Rate Band (RNRB) increases this where the family home is left to a direct descendent such as a child or grandchild. The RNRB is being introduced gradually, starting at £100,000 for the 2017/18 tax year and rising to £125,000 for 2018/19, £150,000 for 2019/20 and £175,000 for 2020/21. Inheritance tax allowances (including the RNRB) are personal and transferrable to a spouse/civil partner if unused. Gifts between spouses/civil partners are free from inheritance tax. If, therefore, by 2020/21 if a couple leaves everything to the other on the first death and then to a direct descendant on the second death, they can benefit from a total allowance of £1 million.
However, with life expectancy now at 79.1 years for boys and 82.8 years for girls, a gift made in your Will could be years too late to help out struggling grandchildren. Further, the above arrangement has implications if your partner needs care after your death. The Local Authority can take all of their assets – leaving just £14,250 – to pay for care fees, including your share of the family wealth.
Gifting now gives grandchildren the help they need when they need it, with less stress from mounting debts.
To avoid a gift falling into your estate for inheritance tax purposes, you’ll need to survive for 7 years after making it. If you don’t, inheritance tax may be due, charged at a tiered rate (from 8% to 40% depending on how long you live after you made the gift). However, gifts of up to £3,000 a year are excluded from this – and you can give up to £6,000 in the current year if you did not use your allowance in the previous year. Therefore, two grandparents can give their grandchild £12,000 this year provided that they did not gift anything last year.
A further issue that grandparents face is the possibility that their life savings may be used for care fees in later life. Deliberately gifting for the sole purpose of avoiding care fees is not recommended as this can be deemed ‘deprivation of assets’ by the Local Authority and can have drastic consequences. However, if you and your partner are both in reasonable health with no care needs anticipated in the immediate future, making a gift of a deposit for a house to your grandchildren with the genuine purpose of helping them onto the housing ladder is very unlikely to be regarded as deprivation.
In the future, if you do need care, you do not need to worry that almost all of your assets will be used up in care fees before you have the opportunity to help your grandchild. Note that gifting your own property if you are still living in it has a high level of risk, various tax consequences and the possibility that the transaction may be regarded as deprivation – speak to us if you would like advice.
When the family home is the main asset, some grandparents consider using an equity release scheme. However, the financial cost of these schemes is usually very high and most financial experts regard them as a last resort. Allowing a charge on your home to support your grandchild’s mortgage or remortgaging may be other options worth considering. A number of lenders offer mortgages to the over 70s and the Halifax accepts applications from those aged 80+.
Want to help your grandchild get a foot on the housing ladder?