In the grand scheme of things, most parents in the UK aspire to provide their children with a solid financial future. An essential part of this planning often involves helping them purchase a property. As we delve into this extensive guide, we will explore various strategies that parents can adopt, such as setting up a trust, gifting money for mortgage deposits, and considerations around inheritance tax.
Establishing a Trust
A trust is a legal arrangement designed to manage assets, including money, investments, land, or buildings, for beneficiaries – usually children. Parents can read up on different types of trusts, including bare trusts, interest in possession trusts, and discretionary trusts, choosing the one that best suits their intentions and their children’s needs.
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The primary advantage of setting up a trust is that it can help in efficient inheritance tax management. When you set up a trust, the property or money you put into it doesn’t form part of your estate, which can reduce potential inheritance tax liability. However, it’s important to note that there can be a tax to pay on assets put into a trust, on certain occasions while the trust is ongoing, and when assets are taken out of or the trust is wound up.
Besides tax advantages, trusts also provide a level of control over who gets what and when, which can be particularly useful if your children are underage or not yet responsible enough to handle large sums of money.
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Gifting Money for Mortgage Deposits
Another way parents can help their children buy a house is by gifting money for a deposit. With property prices continuing to rise, saving for a deposit has become an uphill task for many. Parents stepping in to help can be the difference between their children getting onto the property ladder now or in several years.
For those who do decide to gift, it’s important to be aware of the rules around gifting, particularly in relation to inheritance tax. As per the current rules, parents can give away £3,000 worth of gifts each tax year without them being added to the value of the estate. Also, smaller gifts of up to £250 per person per tax year are exempt.
Moreover, if you gift money and survive for seven years, the gift is usually exempt from inheritance tax, known as a ‘potentially exempt transfer’. If you don’t survive for seven years, the gift is counted towards the value of your estate, and inheritance tax may be due.
Offering a Loan
If you want to help your children buy a house but can’t afford to part with a large sum of money indefinitely, consider offering a loan. This can be done formally, with interest and repayment terms, much like a mortgage from a bank. Alternatively, it can be informal, with loosely agreed-upon repayment terms.
An advantage of this option is that it allows parents to provide the necessary financial help without permanently depleting their savings. However, it’s important to consider the potential impact on family relationships if repayments aren’t made as agreed.
Adding Children to the Will
Adding children to your will is a traditional way of passing on wealth, including property. If your estate (including any houses) is worth less than the current inheritance tax threshold, there’s usually no tax to pay. However, if your estate is worth more than the threshold, inheritance tax will be due.
Remember, anything left to a spouse or registered civil partner is exempt from inheritance tax. Also, if everything above the threshold is left to your children or grandchildren, the threshold can increase to £500,000.
Buying a Property in a Child’s Name
Lastly, you could consider buying a property in your child’s name. While this option is more common for buy-to-let properties, it’s also possible for residential properties. However, this option comes with several complexities, including the fact that your child could sell the property without your consent once they reach 18.
Furthermore, you must also consider potential tax implications. If the property is rented out, any income generated would be taxable in the child’s name. Also, buying a property in a child’s name may affect their eligibility for student finance.
Each of these strategies offers a distinct approach for parents planning to aid their children in purchasing a property. A careful review of each option, ideally with a financial advisor, can help parents align their financial capabilities with their desire to secure their children’s future.
Utilizing Junior Individual Savings Accounts (ISAs)
Junior Individual Savings Accounts (ISAs) are an efficient way of saving for your child’s future property purchase. A Junior ISA is a long-term, tax-free savings account for children. In the tax year 2024-2025, you can invest up to £9,500 in a Junior ISA. The funds are locked away until your child turns 18, at which point they gain full control over the account.
Investing in a Junior ISA is a perfect way to accumulate funds over time for a mortgage deposit. The interest and gains are tax-free, which makes it an efficient saving tool. You can choose between a cash Junior ISA, where you earn interest, or stocks and shares Junior ISA, where you invest in bonds and shares. The latter carries a risk, but it could potentially offer higher returns.
Keep in mind that the money contributed to a Junior ISA cannot be withdrawn until the child turns 18. Therefore, it offers less flexibility compared to gifting money or setting up a trust.
Planning for Stamp Duty Land Tax
When buying a house, one cannot ignore the Stamp Duty Land Tax. It is a tax paid on properties purchased in England and Northern Ireland. The amount of stamp duty owed depends on the property’s cost and if it’s the buyer’s first property.
As parents planning for their children’s future property purchase, it’s worth bearing in mind the possible stamp duty costs. If your children will be first-time buyers, they can benefit from a stamp duty relief. This means they’ll pay no stamp duty on properties up to £300,000 and 5% on the portion from £300,001 to £500,000.
However, if they have been added to your property’s deed or own a share in another property, they would not qualify as first-time buyers. In such cases, you might consider strategies to help them meet this obligation. For example, gifting money specifically for stamp duty or incorporating potential stamp duty costs when saving towards their home deposit.
Conclusion
Planning for your children’s future property purchase in the UK can be a daunting task, but it’s certainly achievable with the right strategies. From establishing a child trust fund to considering tax implications, by incorporating this guide’s tips, you can ease the financial burden associated with property purchase and ensure a secure future for your children.
Remember, estate planning should be comprehensive and include other considerations like writing a will, managing capital gains tax, and exploring junior ISAs. Above all, remember that the ‘Bank of Mum and Dad’ does not need to be the sole source of property funding. Encouraging your children to save and contribute to their property fund can foster financial responsibility.
Inheritance tax planning, gifting property, or money, and understanding stamp duty are all part of this planning process. It is recommended to consult with a financial advisor or solicitor to understand the implications of these actions fully and to tailor a plan that best suits your family’s needs. And while the focus is on buying a house, remember that the ultimate goal is to secure your children’s financial future.
