As parents, we all want to give our children the best start in life, and for many, this includes helping them onto the property ladder. However, there are several factors to consider before making such a significant financial decision.
Gift or loan?
Firstly, decide whether the money you provide will be a gift or a loan. If it’s a gift, you will not have any right to get the money back. If it’s a loan, consider setting up a formal agreement to outline repayment terms. This ensures there is no ambiguity about the expectations on both sides.
Inheritance Tax (IHT) considerations
Helping your child buy a home can also reduce your estate for Inheritance Tax (IHT) purposes. However, remember that gifts will only be exempt from IHT if you live for seven years after making the gift.
Lump sum or regular gifts?
Next, consider whether to give a lump sum or regular gifts. A lump sum can help cover a significant portion of the purchase, but regular gifts from surplus income can provide a steady income stream to help towards the mortgage payments. This can also remove value from your estate much quicker without waiting 7 years. This could also help manage your own finances better.
Protecting family wealth
If your child is cohabiting, consider advising them to seek advice on a cohabitation agreement. This can help protect your family wealth in case the relationship ends ensuring your children’s financial interests are protected too.
Impact on parents’ life
Before giving money away, consider how it will impact your life. Will you have enough money to live on? If you’re considering making pension withdrawals, remember to consider the tax consequences. For example, after considering your own financial situation and potential tax implications, you may decide to wait until you are more financially stable.
Tax consequences
Large lump sums from pensions could push you into a higher tax bracket or cause you to lose your personal allowance. Therefore, it’s crucial to plan your gifts strategically to minimise tax liabilities. Case Study: The Browns wanted to give their daughter a large lump sum to buy a house. However, after consulting with a financial advisor, they decided to spread the gift over several years to avoid pushing themselves into a higher tax bracket.
When you take a lump sum from your pension, here are the key tax implications:
- Tax-free lump sum: You can usually take up to 25% of the amount built up in any pension as a tax-free lump sum.The maximum tax-free amount is £268,2751.
- Remaining amount: After taking the tax-free portion, the remaining amount is subject to tax. Your pension provider will deduct tax before you receive it.For example, if your pension is worth £60,000 and you take £15,000 tax-free, the provider will tax the remaining £45,000.
- Higher rate tax: If you take a large amount from your pension, you might owe Income Tax at a higher rate. Be aware of this possibility.
Pension considerations
Pensions are generally free from IHT, so it might be more suitable to leave pension assets untouched and consider gifting other assets instead. This will still allow you to help your children, while also ensuring your own financial security in retirement.
Lifetime ISA
Encouraging children to save into a Lifetime ISA (LISA) has several benefits:
- Bonus: A LISA allows individuals aged 18-39 to save up to £4,000 annually. The Government adds a 25% bonus on top, potentially giving them £1,000 of free cash each year1.
- Tax-free interest: The interest earned within a LISA is tax-free, making it an attractive savings option.
- First home purchase: Children can use the LISA savings (after having the account open for a year) towards their first home deposit, helping them step onto the property ladder.
- Retirement savings: If not used for a home, the LISA continues to grow for retirement. It’s a long-term investment.
As for parents giving money to their children to put into the LISA:
- It’s a great way to help them save for a home or retirement.
- It fosters a savings mentality and financial responsibility.
Comment
Helping your children onto the property ladder can be a rewarding experience, but it’s essential to consider all the implications. Always seek professional advice to ensure you make the best decision for your family’s financial future.
How can Nelsons help?
Zoe Till is a Partner and Chartered Financial Planner in our expert Independent financial advisers team. Zoe’s areas of expertise include investment advice,retirement planning,Inheritance Taxand lifetimecash flow modelling.
If you would like any advice concerning the subjects discussed in this article, please get in touch with Zoe or another member of the team in Derby, Leicester, or Nottinghamon0800 024 1976or viaour online form.
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This article is for information only and does not constitute legal/financial advice. Please contact us for advice tailored to your specific position. Some of the content presented on our website has been generated with the assistance of Artificial Intelligence (AI). We ensure that all AI-generated content meets our high standards for accuracy and relevance.
