Parents can mitigate some of the risk
Parents helping their children onto the property ladder are being cautioned to be aware of a little-known £3,000 tax threshold rule that could spare families a significant headache further down the line.
With spiralling house prices leaving many first-time buyers increasingly dependent on the so-called “Bank of Mum and Dad”, consumer group Which? is urging parents to get to grips with the tax implications before handing over substantial sums of money for a deposit. Thousands of pounds are being gifted by families to help children purchase their first home, yet those payments could potentially be pulled back into an estate for inheritance tax purposes should the parent pass away within seven years.
Which? says parents can mitigate some of that risk by taking advantage of the annual gifting allowance, which allows people to give away up to £3,000 each tax year without the money being counted towards inheritance tax by HMRC.
The consumer group cautions that parents handing over large lump sums could otherwise be landed with a “hefty” inheritance tax bill. Under current rules, any gifts exceeding the available exemptions may still be liable for inheritance tax if the donor dies within seven years of making them.
The £3,000 allowance can also be carried over for one year if it has not previously been used. This means a couple who have not made any gifts in the preceding tax year could potentially give away as much as £12,000 between them without it counting towards inheritance tax.
Separate gifts of up to £250 per person are also allowed under the regulations. The alert comes as increasing numbers of first-time buyers find it difficult to save deposits while dealing with elevated property prices and stricter mortgage affordability assessments.
According to Which?, providing or lending a deposit continues to be one of the most frequent ways parents assist children in purchasing a home.
Nevertheless, lenders will usually require proof demonstrating where the funds came from. Parents making an outright gift may be required to sign a declaration confirming the money does not need to be repaid and that they will have no legal interest in the property.
For families unable to provide a cash deposit, alternative options include guarantor mortgages, joint mortgages and joint borrower sole proprietor mortgages, where parents support affordability calculations without being named on the property’s deeds.
Which? said: “If you’re looking to help your child buy a property, the good news is that there are several routes available – including gifting or loaning a deposit, acting as a guarantor for their mortgage or taking out a mortgage together.”
The organisation also encouraged parents to seek professional advice before making significant financial commitments, particularly where retirement plans or inheritance tax liabilities could be affected. Specialists advise that families should establish from the very beginning whether money is being provided as a gift, a loan or an investment, and make certain that any arrangements are thoroughly documented in order to prevent disputes further down the line.
As first-time buyers become ever more reliant on financial support from their parents, getting to grips with inheritance tax regulations could prove every bit as crucial as securing the right mortgage deal.
