Parents have long supported children into early adulthood providing financial help when purchasing their first home. A report from the Institute for Fiscal Studies (IFS) published this week highlights just how valuable this support is.
There are, however, serious inheritance tax implications to consider before opening a new branch of the Bank of Mum and Dad, says Olivia Meekin.
Between 2018 and 2020, parents lent or gave their children £17 billion to help them with life events, making the Bank of Mum and Dad one of the more generous lenders in the country.
Over half of that support, the IFS reports, is given to help children take their first step on to the property ladder alongside support with household maintenance or running costs.
But how mum and dad support their children can have serious inheritance tax (IHT) implications.
Gifts
The simplest way to support a child will be through an outright gift, perhaps contributing towards a deposit or house purchase. There is no limit on the value of a gift, but for that gift to fall outside of an estate parents must live for seven years or more (although gifts that exceed the nil-rate band, currently £325,000 will feel some benefit after three years).
Parents may be tempted to retain an interest in the property they have helped their children purchase, perhaps to ensure that it is not sold. However, parents can find that interest means the property remains in their estate for IHT. A gift must be that and with no further involvement.
Additionally, parents can make gifts of up to £3,000 a year with no IHT implications to one child or divided in any way they wish. They can also make a gift of up to £5,000 to a child that is getting married.
Gifts out of surplus income can be another way to help a child onto the property ladder, and helpfully are uncapped and fall outside of the seven-year rule. There are, however, conditions that must be met for those gifts to be exempt from IHT. Gifts must be out of surplus income, meaning you cannot dip into savings. Gifts need also to be considered ‘normal expenditure’, either a regular monthly or annual payment, although they do not need to be for the same amount.
Loans
Many parents will not be in a financial position or will not want to gift the full value of a property to their children. They are more likely to loan the deposit, or a part of it, to a child.
A loan does not fall outside of an estate for IHT purposes and will, of course, need to be repaid. If parents chose to charge interest on that loan it will count as income and income tax may need to be paid. If the loan is not repaid or is later waived, it will be treated as a gift with the seven-year rule applied.
Whilst it may appear rather formal, it is recommended that the repayment terms of the loan are clearly set out and understood by both the parents and the child as it may save problems should they be unable to repay that loan.
Shared ownership
Parents may choose to purchase a property jointly with a child. Whilst it may be for the sole use of that child, it may be considered by HMRC as a second home, attracting higher rates of stamp duty.
This approach is also likely to have capital gains tax implications should the property be later sold for a profit.
Of course, many parents will be looking to help their children onto the property ladder irrespective of the tax implications. Yet, it is good financial sense to be aware of those implications before making loans or gifts.
Contact our Private Client Solicitors
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The above is accurate as at 17 February 2023. The information above may be subject to change during these ever-changing times.
The content of this note should not be considered legal advice and each matter should be considered on a case-by-case basis.
