Update 30 October 2024 – Following the Budget announcement today, some of the details mentioned in this insight may have changed. Please visit our Budget page for further information.
The Institute for Fiscal Studies (IFS) has published research that highlights just how important the Bank of Mum and Dad is to helping children get onto the property ladder.
The Institute for Fiscal Studies (IFS) has published research that highlights just how important the Bank of Mum and Dad is to helping children get onto the property ladder.
Between 2018 and 2020, parents lent or gave their children an eye-watering £17 billion to help them buy property and fund weddings. It is the second time the IFS has conducted this research, reporting that between 2016 and 2018 parents supported their children to the tune of £13 billion.
Rising house prices have in many instances made it much harder for those starting out in life to fund the purchase of a first home without the help of the Bank of Mum and Dad.
David Sturrock, a senior researcher at the IFS told The Times newspaper that “Parents are helping their kids with expensive life events they might not otherwise be able to afford. Half of the value of gifts being received by adult children is being used to buy a house.”
But how mum and dad financially support their children can have serious inheritance tax implications.
Gifts
For wealthy parents with money to spare, the simplest way to support their children will be an outright gift. There is no limit on the value of those gifts, but for those gifts to fall outside of an estate parents must live for seven years (although its benefit will be felt after three years).
It is not uncommon for parents to retain an interest in a property they have helped their children purchase. Here, parents can find that interest means the property falls into their estate with significant IHT implications. A gift, put bluntly, must be a gift without strings attached.
Individual parents can of course make gifts of up to £3,000 a year with no IHT implications with to one child or divided in any way they wish. They can additionally make a gift of up to £5,000 to a child that is getting married.
Gifts out of surplus income can be another way to help a child onto the property ladder or with household expenditure, and helpfully are uncapped and fall outside of the seven-year rule. There are, however, conditions that must be met for those gifts to be exempt from IHT. Gifts must be out of surplus income, meaning that savings cannot be called upon to make such a gift. Such gifts need also to be considered ‘normal expenditure’, either a regular monthly or annual payment, although they do not need to be for the same amount.
Loans
Most parents will not be in a financial position to gift the full value of a property to their children. They are more likely to loan the deposit, or a part of it, to a child. A loan does not fall outside of an estate for IHT purposes.
A loan of course will need to be repaid. If it is not or is later waived, it will be treated as a gift with the seven-year rule applied.
It is recommended that the repayment terms of the loan are clearly set out and understood by both the parents and the child. Whilst it may sound very formal, it may save many problems should the child be later unable to make repayments.
Parents will often choose not to charge interest on that loan, but if they do, it will be considered income and income tax will need to be paid.
Shared ownership
A commonplace third option is for parents to purchase jointly a property with a child. And whilst it may be for the sole use of that child, it may be considered by HMRC as a second home, attracting higher rates of stamp duty.
This approach is also likely to have capital gains tax implications should the property be later sold for a profit.
Of course, many parents will be looking to help their children onto the property ladder irrespective of the tax implications. Yet, it is good financial sense to be aware of those implications before a new branch of the Bank of Mum and Dad opens.
Each family’s circumstances are unique and we recommend speaking to your tax adviser or contact our expert below before taking any action.
