The problems of Generation Rent are well-known. On the one hand, high house prices have driven up the deposits that first-time buyers need to save. On the other hand, rising rents have made it harder for would-be homeowners to save anything at all.
The Bank of Mum and Dad
It’s not surprising that mothers, fathers and other generous relatives are minded to help if they can. Last year alone, almost 260,000 property purchases in the UK were supported by the Bank of Mum and Dad, with an average contribution of over £24,000.
The figures come from Legal & General’s ‘Bank of Mum and Dad’ research, which also found that over a third of people planning to buy over the next five years expect some help from parents.
Some relatives will provide help in the form of a loan, some will offer a gift. If you take the latter approach with your children or grandchildren, you need to be aware of the inheritance tax (IHT) implications. Without careful planning, your kind gift could be subject to an IHT bill if you die within seven years of making it.
It’s not just the surprise IHT bill that can be a burden, it’s the extra paperwork connected with paying the tax if the gift tips the value of your estate over the IHT threshold (£325,000 in the current tax year).
Beware with other gifts too
So far, we’ve just talked about giving financial help with buying a home, but other acts of generosity can also have IHT implications. A gift, says HMRC, can be ‘anything that has a value such as money, property, possessions’.
For example, a surprise holiday, help with the cost of roof repairs or other major DIY projects, a present of a car or family treasures – any of these could be caught in the IHT net if you die within seven years of making them.
Fortunately, however, not all gifts to your younger relatives (or other people) bring potential inheritance bills, and this is where good planning helps. There are several types of ‘exempted gifts’ you can make, including (in the current tax year):
- gifts worth up to £3,000 each tax year (in addition, you can carry any unused annual exemption forward one year)
- up to £5,000 from each parent for a child’s marriage or civil partnership (or £2,500 for a grandchild, and £1,000 for anyone else)
- gifts made as part of ‘normal expenditure out of income’, for example birthday or Christmas presents.
You can combine these exemptions for the same person, so a couple whose child was marrying could each give them at least £8,000 in ‘exempted gifts’ (a wedding gift of £5,000, a £3,000 gift, any unused exemption from the previous year, and a top-up birthday present); other family members could also chip in.
Don’t wing it
As the above example shows, you can certainly give your younger relatives a helping hand onto the housing ladder without coming up against any IHT issues, as long as you are careful about the timing.
It is also possible in future that the IHT rules will be simplified, and that the seven-year rule for gifts will be reduced to, say, five. However, there is no definite timetable for simplifying the rules and no certainty that they will change at all.
In the meantime, IHT is renowned for being complicated – even the government has said it should be ‘simpler, fairer and better’. If you are lucky enough to have spare cash to help your children escape Generation Rent, take advice on when and how best to do it.
