Is ‘Bank of Mum and Dad’ the key?
Property is getting harder to reach for young buyers, with rising house prices outperforming incomes. According to estate agents Hamptons International, the ability to buy deteriorated by 3% in 2014. The so-called ‘bank of mum and dad’ could be the key to helping grown-up children with that all important deposit. Money from parents can bridge the gap between the cost of a new home and what the children can actually afford. A third of parents plan to help their children with money towards a deposit, while a third who have already helped their adult children with a savings pot have given between £5,000 and £10,000.
In April 2015, UK house prices were 5.5% higher than the previous year. There is the incentive to start saving to help your children in the future, particularly with prices expected to increase by 2.3% across the UK in 2016. In 2017, a 4.3% rise is forecast.
Here are seven key steps you can take to help your children or grandchildren buy their first home.
1. How much will you need?
Finding a big enough deposit remains one of the biggest barriers to first-time buyers, particularly in areas such as London and the South East. Helping offspring with a healthy lump sum will help to reduce the amount they have to borrow, which means they could get access to better mortgage rates. The average cost of a home now stands at £271,000, and so buyers would need around £27,000 to meet the minimum 10% deposit. If you want to help your children get on the housing ladder, then planning is essential. The sooner you start, the better prepared you will be.
A regular cash savings plan can help you build a nest egg to hand-over. If house prices were to increase by 40% over the next 10 years, the average house price would be £379,000. To give your child a 10% deposit of £38,000 in 10 years (assuming interest of 2% net of tax), you would need to save £286 per month. If house prices were to grow by 40% over 15 years, you would need to save £181 per month over the same period to provide a 10% deposit.
2. Utilise tax breaks
This is key to maximising returns, says Sean McCann, NFU Mutual Chartered Financial Planner. “Whether your savings are in cash or share-based investments, you should look to maximise your ISA allowance each year to protect returns from Income Tax and Capital Gains Tax.”
A typical family with two parents and two children can shelter up to £38,640 each tax year in ISAs. Each adult can invest £15,240 and up to £4,080 can be invested into a Junior ISA for each child.
First-time buyers will be able to invest in a brand new ‘Help to buy ISA’ due to be introduced in autumn 2015. People saving for their own home will be able to save up to £200 per month. When they take the money out to buy their home, the Government will add a 25% bonus. The bonus is capped at a maximum of £3,000 on £12,000 of savings.
The good news is that the accounts are one per person rather than one per home, meaning that a couple buying together can both receive a bonus.
3. Use your pension
When you reach your mid-40s, a pension becomes less about putting money away for old age and more about being a very tax-efficient way of investing over the next 10 to 15 years plus. Any growth on investments in your pension fund benefits from favourable tax treatment. The price you pay for enjoying the extra tax relief boost on the way in is that the money can’t be touched until you’re at least 55 and while 25% of your fund can be taken tax-free, the rest is added to your income and taxed, but getting the right advice can help minimise the tax bill on the way out.
4. Choose your investment
How you invest depends on personal attitude to risk, so how you divide your money between shares, cash, bonds and property is key.
Those investing for the long term might choose to invest more of their money in equities as there is time to ride out the ups and downs of the stock market. Investing via a fund manager would allow you to benefit from their expertise. Your NFU Mutual Financial Adviser can help you choose the right mix of investments.
5. Draw funds tax efficiently
For older children who are looking to buy soon, there may not be time to save. Instead, you might have to look at drawing on what you already have.
McCann says parents can dip into their retirement fund if they need the money once they reach 55, thanks to the new pension freedoms. “Bear in mind the tax charges,” he warns.
“Do your sums so you’re not pushed into a higher tax bracket and make sure it won’t have a detrimental effect on your own retirement plans.”
Alternatively, use existing investments by drawing on ISAs and deposit accounts, which, unlike most pensions, are included in your estate for Inheritance Tax (IHT) purposes. McCann adds: “Some parents take a more drastic approach and downsize their own home, releasing equity that they can pass on.”
6. Consider Inheritance Tax
Making gifts is a good way to avoid any future IHT liability, assuming that you survive for seven years after the money has been handed over.
Additionally, individuals are allowed to gift £3,000 each tax year, which is immediately exempt from IHT. As this is per person, parents can hand over £6,000 right away. They can use last year’s allowance if they haven’t done so already, making it £12,000.
7. Make the most of a cash windfall
If parents inherit money which is making their IHT problem worse, they could choose to divert the windfall to their children using a deed of variation. Unlike most gifts, it won’t be included in the parents’ estate for IHT purposes even if they don’t survive for seven years. McCann says: “Those entitled under a will or intestacy could choose to pass the money direct to their children or alternatively into a trust to allow them to exercise more control over when and to whom money is paid.”
A Deed of Variation (DOV) must be made within two years of death. The Chancellor of the Exchequer announced a review into the use of DOV in the March 2015 Budget. A report on the findings of the review is expected this autumn. The review will look at cases where people use DOV to change a will just for IHT purposes. DOV allows a will to be changed if all impacted beneficiaries agree. It can also be used to vary the terms of intestacy when no will has been written.