Financial journalist Sarah Pennells explains how you can help young people in your family buy their first property
A recent survey from the Council of Mortgage Lenders found that 84% of first-time buyers under the age of 30 needed help from parents to find the deposit for their new home – the highest proportion on record. So how can parents and grandparents help out?
Start saving when they’re young
If you have a young child playing around the house, they may well be struggling to buy a home in a few years’ time. The easiest way to help is to open a savings account for them now that is expressly for their first home, rather than for, say, university fees.
Parents can give money or open an account on behalf of their child but they are taxed on any interest above £100 a year. Grandparents, however, are not covered by this rule.
Let them inherit early
One way to give your relative a lump sum without incurring inheritance tax (IHT) is to gift it to them. You are allowed to give up to £3,000 a year without attracting the tax. A couple could, therefore, give a young family member £6,000 in a year; grandparents, in particular, might consider this a tax-efficient way of planning the distribution of their estate.
If you haven’t used your £3,000 allowance, it can be carried over for one year, so it would be possible for a couple to hand over £12,000 without any IHT liability. In fact, you can give any amount of money in a year, but it’s then only free from IHT if you live for another seven years (unless you can afford to make regular gifts from your surplus income).
Lend them the money
If you’d rather not give the young person money for a deposit, you could consider lending it. However, it’s important to consider how you will feel if they don’t pay it back as quickly as you would like.
Sarah says: “Friction can also develop if you later disagree with your child or grandchild about what rights your loan gives you over what goes on in the house. For example, if a boyfriend or girlfriend that you don’t like moves into the property would you feel you had a right to complain? Lending money for a deposit can be really helpful but it can sometimes cause more problems than it solves.”
Take out a joint mortgage
Another way to help out is to offer to buy the house or flat jointly with your relative. However, you should remember that, if you’re not living in it yourself, you could incur a capital gains tax charge when the property is sold.
Act as a guarantor
It could also be easier for your young relative to get a mortgage if you act as a guarantor. That means that you guarantee to meet the repayments if they can’t. If you have an existing mortgage, however, you might need to prove that you could pay a second and you’ll need to be certain that your child or grandchild is responsible with money. Take legal advice before going down this route.
With young people finding it increasingly difficult to buy a home of their own, any support that you can provide is bound to be appreciated.
Sarah Pennells worked as a reporter and producer on Radio 4’s Money Box. She has written three personal finance books and runs her own financial website for women, savvywoman.co.uk
The information about tax is based upon our current understanding of HMRC tax legislation. Tax laws could change in the future. Your home may be repossessed if you do not keep up repayments on your mortgage.
