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It’s no secret that house prices are running away from wages, making it difficult for younger people to get onto the property ladder without financial help from parents or relatives. Indeed, today the average house price is 65x higher than in 1970, but average wages are only 36x higher. However, giving financial help to your children to buy a house is rife with tax hazards which can catch out the best well-meaning parents.
In this article, our team at Cedar House shares some thoughts on how to provide financial help to children for a house deposit – in a tax-efficient manner. We hope you find this content useful. If you want to discuss your own financial plan with us, please contact our team for more information or to access personalised financial advice:
020 8366 4400 or enquiries@cedarhfs.co.uk
The tax in the background
When parents want to give money to their child to help towards a house deposit, they often fail to consider inheritance tax (IHT). Here, you need to bear the “7-Year Rule” in mind. This makes gifts subject to IHT if they are made within 7 years of the bestower’s death.
In 2021-22, bear in mind that IHT is levied at 40% on the value of an estate over £375,000. If you are not careful, making a large financial gift to your child could lead to complications when paying your IHT liability (if you die within 7 years).
Having an estate plan can help mitigate this and protect both your future legacy, and the more immediate financial gift you may wish to give to your child. For instance, one way to get around this “trap” is to limit your financial gifts to £3,000. Under the “annual exemption” rules, you can give up to this amount each tax year without the gift(s) becoming counted as part of your estate for IHT purposes.
So, one idea could be to give, say, four sets of £3,000 gifts to your child each tax year over four years (for a house deposit). This means you can eventually give them £12,000 without needing to worry about falling foul of the 7-Year Rule. Over that time, your child can also build up their own savings to combine with the total amount you want to give them.
Using marriage & other gift allowances
If you are married or in a civil partnership, remember that each of you gets their own annual exemption – allowing you both to potentially make up to £6,000 in gifts, per tax year. This could help you get to your total target amount for your child in half the time.
There is another IHT rule which you can use to your child’s benefit, which is those pertaining to “marriage gifts”. Here, you can give up to £5,000 to your son/daughter on their wedding day – or, shortly afterwards – without this subject to IHT. If the person concerned is your grandchild, then you can give them up to £2,500. For any other person, the IHT-free threshold is £1,000. There is no requirement that this gift should be used for the wedding day itself (e.g. paying for the cake or decorations). So, the new couple could put the gift towards their house deposit!
Making use of regular gifts
The UK’s taxation is notoriously complex – so much so, that many people do not even know about the IHT rule about “normal gifts out of income”. Here, you can make IHT-free financial gifts to your child – with no monetary limit – provided specific conditions are met.
In particular, your gift must be deemed to be part of your “normal expenditure”. Also, the gift must come out of your income (e.g. not from a capital gain), which could include your salary, dividends or rental income. The rules also stipulate that your gifts must not affect your standard of living so that it is no longer “normal”.
Whilst this does open up some interesting financial planning possibilities, bear in mind that authorities (e.g. the OTS) have labelled these rules “confusing” and it is possible they may be reformed in the future. Their ambiguity also leaves open the possibility of HMRC scrutinising your decisions if you take a “DIY approach” and do not know what you are doing.
As such, we recommend seeking financial advice if you are considering this option. HMRC is likely to want strong evidence that a gift, made close to close, was going to be the first in a set of future gifts. Here, you may wish to leave a clear email trail with your child, outlining your intentions. It is also a good idea to keep a ready record of tax returns, P60 forms, statements from banks and from investment platforms – which can be provided as supporting evidence by your executors, in the event.
Conclusion
Helping your child onto the housing ladder is a noble aim. However, make sure you do not inadvertently harm your wealth and finances – or that of your child – without a strong tax plan.
Interested in discussing your financial plan with an experienced financial adviser? Get in touch today to discuss your financial plan with a member of our team here at Cedar House via a free, no-commitment consultation:
020 8366 4400 or enquiries@cedarhfs.co.uk