The Local Government Association recently published a report that found the proportion of 25-year-olds owning their own home has halved in the last 20 years.
25-year-olds today find themselves part of ‘Generation Rent’, with the prospect of owning their own home an uphill struggle at best, an impossible dream at worst, as the average house price is now eight times average earnings.
The average age of a first-time buyer is now 30 and a first-time buyer in London now needs a deposit of £85,000 before they can even start looking for the first foothold on the property ladder. How then can parents – in company with their financial advisers – help their children gain this first valuable step on the ladder?
For those able to do so, the most straightforward assistance is to buy a property for their child. A gift of cash to the child is preferable to buying the property and then transferring it to the child, as the purchase of a second property by the parent will increase the rate of stamp duty land tax payable by 3%.
A simple gift of cash has no immediate tax consequences for the parent or child – although, if the parent has to sell an asset to raise the necessary cash, a capital gains tax charge may arise – and, provided they survive for seven years from the date of the gift, no inheritance tax charge will arise on the parent’s death.
There are also a number of exemptions available to reduce any potential inheritance tax liability – a £3,000 annual exemption – with a further £3,000 exemption available if the previous year’s exemption has not been used – and additional exemptions of £5,000 available for gifts on the occasion of a child’s marriage. Furthermore, those with significant income may be able to make use of the normal expenditure out of income exemption. Similar principles apply to contributions towards the deposit or purchase price.
If a parent does not have significant funds to give away, there are other ways in which they can still assist. If a child, even with a deposit, is unable to obtain a suitable mortgage – which, with increasing checks and more stringent requirements, is becoming ever more common – the parent may be able to assist by acting as a guarantor of the mortgage.
This could either unlock a previously unobtainable mortgage, or provide a better deal. It should be remembered, however, that acting as a guarantor carries risks – most obviously, the parent is liable for the payment of the mortgage if the child does not keep up the repayments. It may also cause complications when remortgaging in future if a similar deal is not still available.
Degree of control
Even if a parent is able to assist with a property purchase, they may worry about putting a valuable asset in a child’s name at a still relatively young age and may prefer to retain some degree of control or protection over their contribution.
As such, rather than make an outright gift now, a parent may prefer to buy a property in their own name, for the child to occupy, or jointly purchase the property with the child, and pass it to the child at a later date, when more appropriate.
While providing additional protection, this approach does have some disadvantages. The rate of stamp duty land tax on purchase will increase by 3%, as the purchase of a second home, and when the property is subsequently gifted to the child, or sold, a capital gains tax charge will arise, as the principal private residence relief will not be available.
A better alternative might be to make a loan to the child, which could be released at a later date. The value is retained in the parent’s name, although any increase in value of the property will pass to the child, and on the death of the parent, the value of the loan will be an asset in their estate for inheritance tax purposes.
The loan can be released at any time – which will be a gift for inheritance tax purposes – while, in the meantime, the parent’s interest can be protected by a charge over the property.
Any of these options, if available, will help to reduce the size of that first step on to the property ladder.