Passing Down Property Wealth: Guidelines For Gifting Money To Children In The UK Real Estate Context
Transferring wealth to the next generation is an important goal for many parents in the UK. With rising property prices, gifting money to adult children to help them get on the property ladder is becoming more common. However, there are important guidelines to follow when gifting money for a property purchase, especially when it comes to taxes and potential implications for means-tested benefits. This article provides an overview of key considerations for parents looking to gift money to their children to buy property in the UK.
The Benefits of Gifting Money for Property
There are several potential benefits to gifting money to grown-up children for a property purchase:
- Helping children afford their first home – With rising house prices and stricter mortgage lending criteria, gifting funds can help adult children cover the deposit on their first home. This gets them on the property ladder sooner.
- Early inheritance – Rather than waiting until parents pass away, gifting money during one’s lifetime helps children benefit from the money sooner. This can improve their quality of life.
- Potentially reducing Inheritance Tax – Any gifts made more than 7 years before the death of a parent are exempt from Inheritance Tax, providing tax planning opportunities.
- Investing in property – Money gifted can become a property asset for children, rather than sit in low-interest savings accounts. The property can appreciate over time.
- Strengthening family ties – Gifting money to help a loved one is often rewarding for the giver as well as the recipient, bringing families closer together.
Rules and Regulations on Gifting Money
There are certain rules and regulations to be aware of when gifting cash for property:
- Seven-year rule – Any money gifted only becomes entirely exempt from Inheritance Tax after 7 years. If the parent dies within 7 years, the money may still be subject to Inheritance Tax, with a tapering relief as years pass.
- Annual exemption – Individuals can gift up to £3,000 each year without the gifts being subject to Inheritance Tax. This exemption can be carried forward by one year if unused.
- Small gifts exemption – You can give up to £250 per year to as many people as you like free of Inheritance Tax.
- Potential effect on means-tested benefits – Gifting money can affect benefits like Universal Credit or Pension Credit if it takes parents below the capital cut-off thresholds. Seek benefits advice first.
- Income tax for children – Money gifted by parents is not treated as taxable income for children. However, income or capital gains from invested gifted money are taxable.
- Stamp Duty Land Tax – This may be payable if the gift takes the child over the property price threshold for SDLT.
Overall, it’s important to be aware of tax and benefit implications when gifting money and to take professional financial advice.
How Much to Gift Children for a Property
Deciding how much to gift children for their first home is a very personal matter, dependent on your finances and circumstances. Some key factors to consider are:
- Deposit amount required – How much of a deposit do your children need for their desired property? The minimum is usually 5-10%.
- Mortgage availability – How much mortgage finance can your child access based on their income and existing debts? Co-borrowers like a partner can help.
- Future wealth plans – Do you need to retain capital to provide for your future or to gift to other children? Don’t gift what you can’t afford.
- Inheritance Tax planning – Gifting excess capital over the 7-year Inheritance Tax exemption threshold can reduce the value of your estate.
- Means-tested benefits – Gifting too much in one go could affect any benefits you receive. Take benefits advice.
- House price ceiling – Consider gifting no more than is needed for a modest starter home in your children’s area. Don’t fund an overly lavish property.
As a guide, between 5-15% of a property’s purchase price is commonly gifted, but the appropriate amount for you depends on your financial situation.
How to Gift Money for a Property
If you decide gifting money is affordable and appropriate, here are some options on how to go about it:
- Direct bank transfer – Wire the money directly to your child’s bank account. Keep a record of the gifting paperwork.
- Cheque – Write a cheque payable to your child. A clear audit trail is important.
- Loan – Offer the money as an interest-free, repayable loan rather than an outright gift. This provides flexibility if circumstances change.
- Lifetime ISA – Contribute towards your child’s Lifetime ISA. Savings and government bonuses can go towards their first property.
- Deposit account – Set up a designated deposit savings account and contribute monthly payments. This builds up funds over time.
- Flexible mortgage – Explore ‘family assist’ mortgage products that allow you to pay up to 20% of the property value directly to the conveyancer.
Take steps to formalise and document the monetary gift carefully. Seek guidance from a solicitor or financial advisor as needed.
Ongoing Costs of Home Ownership
When gifting money for a deposit, don’t lose sight of the ongoing costs of home ownership. Plan how your child will cover:
- Mortgage repayments – Make sure your child takes on an affordable mortgage requiring no more than 35-40% of their take-home pay. Consider assisting with payments if needed.
- Maintenance costs – New homeowners often underestimate expenses for repairs or replacements. Budgeting help may be required.
- Insurance – Your child will need adequate building and contents insurance in place from day one. Review if you can get a better deal.
- Utility bills – Bills for things like water, gas and electricity add up. Consider paying these directly as an ongoing gift if affordable.
- Property taxes – Costs like council tax and ground rent need to be handled. Offer guidance on getting the best deals.
- Furnishings – Your child may need help furnishing their new home. Be selective in what you purchase. Look at second-hand options.
With open communication and financial awareness, parents can provide great support when gifting money for a deposit without over-burdening themselves or enabling poor money management in their children.
Impact on Child Benefits and Pensions
It is important to consider how gifting money for a property could impact any means-tested state benefits your child receives.
- Universal Credit – A lump sum gift could take your child over the £16,000 capital threshold, reducing their Universal Credit temporarily or long-term. Look at gifting in instalments.
- Pension Credit – Gifted savings may affect this benefit for your child once they reach retirement age. The capital cut-off is £10,000. Again, incremental gifting helps.
- Income Support – This benefit has a £16,000 savings limit, so gifted capital could end eligibility if it takes your child over. Other factors like work status are also considered.
- Housing Benefit – Homeowners are generally not eligible for Housing benefits, so gifting a deposit could affect a claim. Your child would instead need to budget mortgage costs from their normal income.
- Employment and Support Allowance – Gifted capital up to £16,000 is usually ignored, but seek benefits advice to understand any impact.
Careful planning and research around benefits are required if your child currently claims support. You may choose to gift money over time to minimise disruption to any claims.
Considerations Around Joint Purchasing
If your child is buying with a partner, there are some additional factors to weigh up when providing gifted deposit funds:
- Shared ownership – Even if you only gift to your child, the property will most likely be jointly owned. You are enabling ownership for both.
- Mortgage affordability – The lender will consider both partners’ incomes when determining the amount they can borrow. Your child’s partner may enable them to access a higher mortgage.
- Unequal gifting – You may consider gifting money just to your child rather than their partner. However, this could cause an asset imbalance in the relationship.
- Protection – If the relationship breaks down, your child could be forced to sell the home and have reduced access to the gifted capital. Legal advice on protection is recommended.
- Marriage – Assets like property are usually shared 50/50 in the event of divorce. A prenuptial agreement can change this but comes with its considerations.
Overall, take time to speak to your child and their partner openly when gifting for a joint purchase. Agree on clear expectations. The money can help the couple, but ensure your child’s interests are protected.
Options for Gifting Outside of Cash
Beyond cash gifts, there are a few other options parents could consider to help children buy a property:
Offering Yourself as a Guarantor
Acting as a guarantor on your child’s mortgage enables them to borrow more based on your income. However, beware you are legally liable for payments if your child defaults. Make sure you can afford the additional risk before guaranteeing a mortgage.
Gifting an Existing Property
You could gift (or sell at below market value) an existing property you own, such as a rental flat or holiday home. Your child saves on purchase costs and can sell to unlock equity. However, CGT and SDLT may apply.
Using Your Home as Security
Some parents choose to take out a secured loan against their own home to release capital for their children. This involves risk – if you breach the loan terms your home is at risk. Seek legal and financial advice beforehand.
Joint Purchase with Your Child
Buying a property jointly with your child means you retain partial ownership and control. You can charge below-market rent. However, taxes are complex for shared ownership. Seek professional guidance first.
Leave Property in Your Will
Leaving property to your children in your will ensures you retain control during your lifetime. However, children only benefit once they pass away. There is no access to gifted capital before then.
Each option has pros and cons to weigh up. Get independent advice when exploring alternative routes to gifting cash. The right approach depends on your specific circumstances.
Protecting Your Interests When Gifting
Understandably, parents want to protect their financial interests when gifting money to children. Some tips include:
Make Your Intentions Clear
Have an open discussion and set clear expectations. Explain if the money is an unconditional gift or if you expect it to be repaid either in your lifetime or through inheritance. Get this in writing if loaning money.
Take Separate Legal Advice
To protect your rights, consult a solicitor independently from your child’s solicitor on matters like terms of repayment or percentage of ownership if gifting a property.
Request Ongoing Communication
As a condition, you might request children keep you informed on matters like mortgage payments, property maintenance and capital improvements. This helps ensure the money is being used well.
Withhold Part of Your Gift at First
Rather than hand over the full amount upfront, consider breaking it into stages, with part provided initially, and subsequent amounts once your child has demonstrated financial responsibility.
Title Deed Restrictions
If gifting a property, your solicitor can help impose conditions on the title deed, for example preventing a sale without your permission or giving you the right of first refusal to buy it back.
While wanting to help your children, it is also prudent to take precautions to protect the money you have worked hard to acquire. Obtain professional advice throughout the process.
Navigating Family Politics and Relationships
Parents should be mindful of wider family relationship dynamics when gifting money for property. Issues to reflect on include:
- Fairness – If you help one child but not another, this risks accusations of unequal treatment, especially if reasons are not sensitively explained. Be transparent.
- Family pressures – Relatives like siblings or in-laws could apply pressure around gifting. Don’t let their unsolicited opinions sway your judgment.
- Disputes – Tensions can arise if children feel money was unfairly gifted or should be repaid/inherited in a certain way. Manage disputes calmly.
- Marriages – Gifting to a married child could appear to prefer their spouse. Consider implications for other married children.
- Dependence – Ensure your financial help promotes independence in your child, rather than ongoing reliance on the “Bank of Mum and Dad”.
- Personal circumstances – Consider each child’s needs on a case-by-case basis rather than taking a blanket approach to gifting.
With open communication and sensitivity, parents can minimise relationship issues when providing property gift money. Being transparent on motivations and boundaries is key.
Alternative Options to Explore
Beyond gifting money, parents can also support children’s property purchases in other helpful ways:
- Act as guarantor – Provide a guarantee on their mortgage application rather than cash funds.
- Offer practical help – Assist with the property search, conveyancing, removals etc to ease stress.
- Clear debts – Pay off any outstanding credit cards or loans to improve mortgage affordability.
- Co-sign mortgage – Add yourself as a co-borrower if your child is struggling to get approval alone.
- Provide furnishings – Buy key items like white goods to reduce initial costs. Focus on essential big-ticket items.
- Assist with renovations – Contribute sweat equity to do up the property before or after purchase. DIY skills can save cash.
- Help find lodgers – Lodgers can assist your child in covering the mortgage. You could help screen potential housemates.
- Sublet spare rooms – If space, rent out a room yourself to provide rental income to your child.
Explore all options to identify alternative routes to get your child on the property ladder without purely handing over money. A combination of financial and practical support is often the most effective.
Summary of Key Considerations
When gifting money to help children buy property, keep these key considerations in mind:
- Understand tax rules around gifting and record transfers carefully
- Determine what amount works for both your and your child’s financial situation
- Make sure your child can afford ongoing home ownership costs, not just the deposit
- Consider impacts on both your and your child’s existing or future benefits
- Take professional legal and financial advice throughout the process
- Have open conversations and set clear expectations with your child
- Protect your interests appropriately when providing a gift
- Be mindful of wider family relationships and perceptions of fairness
- Look at alternatives like guarantor mortgages alongside direct gifting
With proper planning, advice, and communication, gifting money can successfully help the younger generation onto the property ladder without jeopardising their own financial stability.