Shona Lowe, private client and corporate director at 1825, shares four tips on how families can help children and grandchildren to purchase their first home, now and in the future.
Save into a Junior ISA
If you want to get a head start on saving for a child’s house deposit, a parent or guardian can open a Junior ISA as soon as the child is born or at any time before they reach 18. £9,000 can then be paid in the 2020-2021 tax year. A Junior ISA is a long-term tax-free savings account specifically for children and therefore is a tax efficient way for parents and grandparents to make a one-off or regular gifts to younger children for their future. It’s important to remember that the child can take control of the account at 16 and withdraw the funds at 18 so if feels too early, you might want to consider a trust instead.
Gift tax free to build up a deposit
You can gift up to £3,000 tax free a year as part of your inheritance tax annual allowance to family or loved ones. Anyone, including both parents and all grandparents can do this which could add up to £18,000 in just one year if two sets of grandparents, and both parents, can all chip in. That can all go towards building up a healthy deposit and that’s before any investment growth or interest comes on top. It’s also worth noting that if you’re new to gifting and didn’t use your annual allowance last year then it can be carried over – this means you could gift £6000 this year and £3000 in subsequent years.
Buy it with them
If you want to help your child, or grandchild, buy their first home but they can’t get a mortgage on their own then a joint mortgage may be an option. It means that both parties are equally responsible for repaying the mortgage and can give access to larger mortgage sums. However, going down this route can open you up to paying additional stamp duty and capital gains tax so it’s important to seek advice first. It’s also worth looking at whether other mortgage options could work for your family, such as raising capital from existing properties, a joint borrower single proprietor arrangement or a ‘springboard’ mortgage’. Specialist mortgage advice can make a real difference here. And remember it’s not just parents or grandparents who can jointly own a property; siblings can be an option too.
Use a trust fund
If you have already set aside money in a trust for your children or grandchildren, you may be able to give them capital from the trust to fund a house purchase. Or if loss of control is a concern, then the trust could buy and own the house whilst giving your child or grandchild the right to live in it. Trusts can be a very effective part of long-term financial planning but they can also be complex so specialist advice is key here.
Shona Lowe said, “Securing a mortgage as a first-time buyer has become increasingly difficult in recent months. As prospective homeowners look to capitalise on the stamp duty holiday, which saves buyers up to £15,000, mortgage options have become more limited, particularly for those with smaller deposits.
“Whilst there are several government schemes for first time buyers, in many cases this has meant that parents and grandparents are understandably looking into ways to help, with ‘gifted deposits’ being one way to do that. This is definitely an area where the Bank of Mum and Dad, or even Granny and Grandad, can have a really important role to play and lots of different ways it can do that.”