The life of a parent can sometimes feel a bit like being a walking ATM, as you routinely open up your wallet to cover your child’s every need on their path from childhood to adulthood.
You might expect some respite once your child starts to build a life of their own, but the world is changing, and it is becoming increasingly difficult for young people to make major financial steps independently.
You will probably want your children to make their own way in life and build their own successes. However, everyone needs a helping hand from time to time – and that is particularly true when it comes to buying a home.
According to the Office for National Statistics (ONS), full-time employees in England are likely to spend 9.1 times their annual income on purchasing a home as of the start of 2022, compared to 7.9 times in 2020.
This has increased the importance of the Bank of Mum and Dad (BOMAD) in supporting their children’s attempts to become first-time buyers.
According to Savills, BOMAD loans will make up almost half of first-time property purchases between 2022 and 2024 with gifts from parents totalling £25 billion over the next three years.
Read on to discover how you can help your own children get onto the first rung of the property ladder and the mistakes to avoid making along the way.
A growing gap between average earnings and property prices is putting pressure on the BOMAD
Children born around the start of the millennium might be finishing up their university educations and beginning to think about how they can afford to get a place of their own.
But when looking at the trends in average earnings against average housing costs from the year 2000 through to the present day, there is an increasingly growing gap.
According to data on earning trends reported by the , UK average earnings back in the year 2000 were £18,848, while average housing prices by December of 2000 had reached £84,191 according to the Land Registry’s housing price index.
This means that the average property in 2000 cost approximately 4.3 times average annual earnings, which is significantly less than the 9.1 times the ONS estimates today. The gulf is growing and putting added pressure on first-time buyers to save for rising deposits.
In 2020, 131,000 first-time buyers relied on family assistance to help them get a mortgage. According to Savills that figure rose to 198,000 in 2021 and is expected to rise by another 470,000 over the next three years – or approximately one in every two first-time buyers.
The Help to Buy scheme has provided first-time buyers with another form of financial assistance totalling £2.9 billion. However, this will end in March 2023 and remove another avenue of support from tens of thousands of aspiring homeowners.
Although the obstacle of rising interest rates is making mortgages more challenging, the main hurdle that first-time buyers are struggling to overcome is saving enough for the deposit.
For many households, this is where the BOMAD have been able to plug the hole between a child’s savings and rising property prices.
Provide your children with the boost needed to get on the property ladder
One of the benefits for parents in gifting your child with a form of early inheritance is that it can help you to potentially avoid a large Inheritance Tax (IHT) bill.
Gifts are typically tax-free if they make up less than the £3,000 annual exemption in a tax year (although any unused amount can rollover into the following tax year).
Gifts given more than seven years before you die, such as those towards a house deposit, are also likely to be exempt from IHT. So, there’s an incentive for parents to transfer wealth at a younger age to avoid getting caught out by IHT rules.
In most other circumstances, gifts will typically be liable to IHT with tax charged at 40% on estates above the £325,000 threshold (£500,000 if you plan to leave your home to a child or grandchild).
Another way to potentially navigate IHT is to provide financial support by offering your child an interest-free loan to help with mortgage payments, although this has caveats.
Many banks will accept loaned deposits from family members provided there is a signed declaration of terms. However, loans can still fall foul of IHT rules if you fail to waive the debt as a gift at least seven years before you die.
More parents are choosing to gift their inheritance earlier in life when their child might need it most and when they are able to witness it being put to good use. You are also far more likely to live for seven more years when gifting at 50 than you are at 80, so timing has its benefits too.
Avoid simple mistakes when gifting money
Your children are always a priority, which can make it very easy to lose sight of your own needs when providing financial assistance.
We’ve covered how important it is to avoid potentially hefty taxes in the event you breach gift or IHT limits. But it is also vital that you don’t forget about your own short- and long-term needs in trying to aid your children.
Don’t gift more than you can afford. If you’re not sure whether any gift you plan to make is affordable or advisable, then working with a financial planner can help you create a cashflow plan to ensure your gift doesn’t hinder your own plans or leave you short in an emergency.
You should also think about running the BOMAD like an actual bank with formal agreements and contracts in place to protect your and your child’s interests.
For example, a formal loan agreement can protect you both in the event of your death, when your child could suddenly be hit with an IHT bill on the money that you had previously gifted to them.
Other forms of contract such as a Declaration of Trust or a Living Together Agreement can ring-fence your investment – for example, if your child is buying with a partner and you want to ensure their partner doesn’t benefit from your gift if they later separate.
Get in touch
Helping your child get on the property ladder can be life-changing for their future prospects. However, it is important to approach any arrangement like any other financial decision.
If you’re unsure about the best way to assist your child in saving for a deposit or obtaining a mortgage, then seek reassuring advice by emailing mail@delaunaywealth.com or calling us on 0345 505 3500.
Please note
This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
This article is no substitute for financial advice and should not be treated as such. To determine the best course of action for your individual circumstances, please contact us.
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