For all the talk of boomers vs millennials, parents and grandparents with cash to spare will often want to help the younger generation. They have plenty of options, but it’s key to consider the tax and risk implications.
The simplest way to help is a straightforward financial gift. The recipient won’t have to pay any income tax on it, but it can affect inheritance tax. The simple principle is that any money you give as a gift will still count towards the value of your estate (and potentially attract inheritance tax) except in specific circumstances.
One exemption is time: if you live more than seven years after making the gift, it’s not counted towards your estate. If you die between three and seven years after the gift, a special lower inheritance tax rate applies depending on the precise time. If you die less than three years after the gift, it’s covered by the normal inheritance tax rate.
You also have an annual exemption that means the first £3,000 you give away each year isn’t counted as part of your estate. A separate one-off exemption covers a gift for a wedding or civil ceremony: £5,000 for a gift to your child, £2,500 to your grandchild and £1,000 to anyone else.
School fees for a grandchild are also exempt, though this only applies if you make regular payments and it’s clear you can afford them. Finally you can give up to £250 a year to any individual who isn’t covered by any other exemptions.
One alternative to an immediate gift is to put money into a savings plan, for example with the aim of helping the child with university costs when they turn eighteen. A Junior ISA is a way to do this without attracting tax on the savings or growth. It comes in both cash and stocks-and-shares versions.
Only a parent or guardian can open a Junior ISA, but anyone can put money into the Junior ISA once it’s open. Legally the money belongs to the child, though they can’t withdraw it until they turn eighteen.
As a slightly offbeat option, you can technically set up a pension scheme for a child or grandchild and make contributions with the same government ‘top up’ as any other pension. In the very long term this is one of the biggest potential ‘returns’ on your gift, but it’s definitely an option to think carefully about and get expert advice on.
Perhaps the most common way to financially help a child or grandchild is with their first home purchase. The ‘bank of mum and dad’ is a common source of funds for a deposit, though remember it will come under the same rules regarding inheritance tax as any other gift.
The mortgage provider will likely ask you to legally confirm it’s a gift (not a loan) and that you are not expecting or claiming any financial interest or ownership of the property. You’ll usually have to provide bank statements and other relevant paperwork, often going back six months, to prove you aren’t involved in money laundering.
Even with a deposit, first-time buyers may struggle to get a mortgage for their desired property, so parents and grandparents may want to help beyond a simple cash gift. One option is to act as a mortgage guarantor in which you become responsible for the payments if your children or grandchildren fall behind. That’s a risky proposition and you should never consider it without expert advice.
Another risky option is a family deposit mortgage. Instead of the borrower paying a deposit, you can put some money up front. If the borrower makes all the scheduled payments for a set period (often five years), you’ll get the money back, sometimes with interest as well.
FAMILY OFFSET MORTGAGE
It’s also worth exploring a family offset mortgage. This doesn’t affect the initial deposit and purchase. Instead you can put some of your savings into a special account. You won’t earn interest, but as long as your money is in the account, the lender effectively deducts it from the outstanding mortgage balance when they are calculating interest costs. That gives the borrower the option of paying less each month, or paying the same amount and clearing the mortgage quicker.