With the average house costing nearly nine times the typical salary, Meg Saksida looks at how parents can help younger generations in the housing market.
Housing is exorbitant, and notwithstanding the predictions of doom and gloom and a global post-pandemic depression, the price of bricks and mortar remains high (even compared to two and three years ago) but also out of the reach of our younger generation coming on to the housing market.
With the average salary in 2021 (according to the Office of National Statistics) at £38,000 and the average housing price at £292,000 in July 2022 (HM Land Registry), those at the bottom of the property ladder are looking at an average of nearly eight times their salary to purchase a house.
First-time buyers
Most banks require first-time buyers to have a 15% deposit. A purchaser would therefore need to save around £6,000 to purchase an averagely priced house, not including the expenses of roughly £2,500 (which.co.uk) for conveyance, valuations etc. and stamp duty land tax (SDLT) of roughly £2,500 (post-23 September 2022). Once purchased, monthly interest would average at around £1,500, using an average rate of 6% in 2022 (the Homeowners Alliance).
The monthly net salary of a £38,000 a year income would yield, after income tax and National Insurance contributions, around £2,500 a month, meaning the mortgage would be around 60% of the homeowner’s household income!
How can parents help tax-efficiently?
(a) The deposit
Gifting a lump sum of cash to help with the deposit of up to £3,000 per parent per annum is an exempt transfer for inheritance tax (IHT) purposes. If the parents wish to gift over £3,000, the transfer will be exempt if the parent survives seven years from the gift. Furthermore, after three years any IHT charge is reduced by 20% a year until the seven-year point.
The parents could, of course, ‘supersize’ this gift to cover the whole value of the house. This may, however, be risky due to immaturity and the risk of divorce and bankruptcy.
(b) The mortgage payments
The parents could also pay the mortgage payments for the child out of their excess income and have this ignored as a gift for IHT purposes under the ‘normal expenditure out of income’ exemption.
The payments would need, firstly, to be a regular and predictable gift, so ad-hoc payments would not be covered. Secondly, they would need to be out of the parents’ income such that they were able to live the way they were accustomed to after the gift.
Setting up a trust
A trust might be another option. The parents could purchase a property for the younger generation and settle it into a trust, making themselves the trustees in order to retain control. The trust deeds could allow the beneficiary child to live in the house. The freshly bought property would be free of capital gains tax going into the trust, but SDLT would be payable and at the higher rate if the parents already have a residence. Any income from the property (flatmates’ rents, etc.) would be taxed on distribution on the beneficiaries and use their (usually lower) income tax rates and personal allowances.
Keeping the property value under £325,000 would ensure there was no entry charge or periodic charges in the trust but, depending on increases in the value of the property, these might come in later years.
Giving an ex-rental property
Giving an ex-let property to children is another option; but this has, in addition to the risks outlined above, a possible CGT charge on the parents, depending on how long they have owned it and how much of a gain has arisen. CGT gift relief is unlikely to be available due to the property not being a business asset.
Practical tip
If the older generation wishes to keep control of the asset, a trust is a good option.
