Homeownership and the bank of mum and dad
BY Ned Browne
20th Jan 2017 Property
According to Legal & General, the bank of mum and dad lent their offspring £6 billion in 2016 and they have predicted this lending will rise to £6.5 billion this year. In fact, more than 25 per cent of all property purchases are funded or part funded by that most unorthodox of banks. Is it right for you?
When Shakespeare penned the line "neither a borrower nor a lender be," he definitely had a point. Money is one of the biggest causes of family disputes. As a rule, if you are lending the money, you have to be able to afford not to get it back and be comfortable with that. If you’re gifting the money, it may well be a way to reduce your inheritance tax liability.
Currently, if your estate is worth over £325,000 you are liable for inheritance tax on everything over that amount at a rate of 40 per cent. That threshold has not risen for some time, despite rapidly rising property prices. Indeed, according to the Office for National Statistics, a typical home in the UK costs £220,100 as of April 2017.
Given this, many more people now have estates worth more than the inheritance tax threshold. This is something to consider.
Beware of the taxman
The average “loan” to children is almost £25,000. As such, you need to be aware of the inheritance tax implications. If the money is genuinely a loan, it’s important appropriate documentation is put in place that will satisfy the taxman—this will also help avoid possible future family disputes.
If it’s a gift, there are other implications: Everyone has an annual inheritance tax gift allowance which enables you to give money away each year to your children without worrying about inheritance tax. The annual allowance is £3,000 per person. However, this is the benefactor’s personal allowance, so if you have more than one child, you would need to split this between them.
There’s also a one-year carryover allowance, so if you haven’t used your allowance one year, you can gift £6,000 the following year.
If you wish to give your child more than the tax-free allowance, things get more complicated. If you die within seven years of making that gift, some inheritance tax will be payable under the “seven-year rule”, which measures the number of years between the gift and your demise. This is how the “taper relief” is calculated:
Years between gift and death |
Tax paid |
|
3 or less |
40 per cent |
| 3-4 | 32 per cent |
| 4-5 | 24 per cent |
| 5-6 | 16 per cent |
| 6-7 | 8 per cent |
| 7 or more | 0 per cent |
Keep it in the family
It would that seem the key advantage of lending money to enable your children to get onto the property ladder is that it allows them to create wealth for themselves, as opposed to paying rent to a landlord.
In other words, you’re keeping money in the family. But tread carefully—anything with the potential to tear a family apart needs to be handled with gloves.
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