How can I help my family get on the property ladder?

• Slowing house price rises and the stamp duty holiday could mean it’s a good time for the next generation to get onto the property ladder.

• Parents and even grandparents may want to help the younger generation to make the move.

• There are many ways to help financially, depending on your family’s circumstances

Owning your own home is a common aspiration. A survey by the Close Brothers in 2019 found that 65% of non-home owners wished they could achieve it. But as reported by Mansion Global at the end of 2019, the exponential rise of house prices over recent decades, means it’s not an easy move to make. However, the new stamp duty holiday may have created a window of opportunity. Making it cheaper for other owner-occupiers to trade up could encourage more people to move and thereby bring more properties to the market. And for first time buyers living in historically expensive areas, the potential costs of buying their first home have fallen.

Because of the coronavirus lockdown, the traditionally buoyant spring housing market ground to a standstill in the UK. And as the Telegraph reported in early July, house prices have fallen for four months and sales, are stalling.

In a bid to reboot the housing market, Chancellor Rishi Sunak has just announced a stamp duty holiday for the first £500,000 of a property’s purchase price until March 2021.

What are the stamp-duty savings?

Before the announcement, first-time buyers were exempt from stamp duty on the first £300,000 of a property’s price on properties purchased up to £500,000; everyone else paid £15,000 (nothing on the first £125,000, 2% on the next £125,000, and 5% on the balance).

A first time buyer spending £500,000 on a property would have been liable for land duty of £10,000 (nothing on the first £300,000 and 5% on the balance); everyone else would have paid £15,000.

Buy-to-let investors and those buying second homes will still face a surcharge at all levels including the standard zero per cent band, meaning their bills will start at 3%.

This is illustrated in Table 1 below.

The two things a prospective property owner needs to have in place are a deposit (typically 10%–20% of the property’s value) and a mortgage agreement. Both of which parents and grandparents can help with.

How can I help my children or grandchildren with a deposit?

According to the Land Registry, the average cost of a UK property at the end of April 2020 was £231,855. Depending on where you’re looking to buy, a 20% deposit would need to be somewhere between £25,000 and £95,000.

The ‘Bank of Mum and Dad’ has become one of the most significant sources of deposit funding for first-time buyers in recent years. In fact, if it were a bank, it would be a top 10 mortgage lender!

So how can you go about helping with a deposit in as tax-efficient a manner as possible? Gifting

According to current HMRC rules, you can gift up to £3,000 every tax year without incurring any kind of inheritance tax (IHT) charge. But that’s across all gifts.

If the person you’re gifting to is getting married or entering a civil partnership, each parent can gift them £5,000 and each grandparent or great grandparent can gift them £2,500 without it being included in their estate for IHT purposes. Other relatives and friends can each give £1,000.

Even with help from relatives, it may still take a young person several years to build a deposit. Of course, you can gift someone as much money as you like and providing you outlive the gift by seven years, and provided all gifts come to less than your nil-rate band for inheritance tax purposes (currently £325,000), there is no inheritance tax to pay.

Surplus income

If you have enough income to maintain your usual standard of living, you can make gifts from your surplus income. For example, regularly paying into your child’s savings account. But you have to be able to prove it hasn’t come from your capital or savings so you need to keep very accurate records of your usual expenditure to prove this.

ISAs and LISAs

If the would-be homeowner has a good few years of saving for that deposit ahead of them, putting the gifts in an ISA to invest their savings will mean any growth or reinvested income will be free of tax.

Read more: This ISA season is cash really king?

Available from March 2017, the Lifetime Individual Savings Account (LISA) was designed with saving for a deposit in mind. As well as capital growth or income being free of taxes, whenever money is invested in the account, the government provides a 25% top-up.

The important thing to note is that once money’s been place in a LISA, it can only be withdrawn to put towards the purchase of a house or, from the age of 60, as part of a retirement strategy. Otherwise a tax charge of 20% of the withdrawal amount is triggered.

Can I help with the mortgage?

Yes and there are a number of ways you can do this.

Acting as a guarantor

This is perhaps the best known way in which you can help. If your child or grandchild has their deposit, but perhaps works as a freelancer or is self-employed, you can make the path to property ownership smoother for them by being a guarantor for their mortgage.

Generally, a guarantor must own their property or have a generous share of equity in it. They must also have a high enough income to meet the mortgage repayments, if needed. Finally, they need a strong credit record.

This is a serious step, which should only be taken after careful thought. You will be liable for any failed mortgage payments, and in the worst case, you could lose your own home.

Before standing as guarantor to anyone, it’s important you take legal and financial advice, to ensure this is the right decision for you. Nor would we recommend equity release as the first recourse for raising the money to help the next generation.

Read more: is equity release a sweet release?

Student mortgages

One version of the guarantor mortgage is a ‘student mortgage’. Some mortgage providers allow student children (guaranteed by their parents) to buy properties in major university towns and rent out rooms to other students.

• The good news is that as this is their main residence (and provided it remains their main residence) any profits are exempt from capital gains tax when they decide to sell.

• And they can also earn up to £7,500 a year (after mortgage payments and expenses) free of income tax from renting out a spare bedroom to another student.

• However, if they take in more than two lodgers, their home will count as a House with Multiple Occupation (HMO) and they’ll have to comply with a range of extra health and safety requirements.

Joint mortgages

This kind of investment could allow your child to buy a more expensive house, as their ability to meet their mortgage obligations (the interest and any repayment schedule) will be based on your joint incomes, your home equity, and your ability to repay their mortgage if required.

However, this is generally only an option if you are still working and lenders may decline to give a mortgage if you are over a certain age. It could also be a problem if you still have a mortgage on your main residence, as it might involve you taking out a second mortgage.

If you own your own home, you could be liable for a 3% stamp duty surcharge as the property would be classed as a second home even though you wouldn’t be living there. And further down the line you could be liable for capital gains tax if and when the property is sold.

Family schemes

These take a slightly different approach and each lenders offers its own variants.

For example, a linked deposit account in the guarantor’s name which has to remain in place until a certain amount of equity on the new property has been repaid. Or the guarantee has to remain in place for a minimum number of years.

In an offset-style mortgage the parent’s deposit account is used to reduce the amount of interest charged on the child’s mortgage. It means the parents don't have to gift the money but there's unlikely to be any interest paid on the savings. You might also need to retain the deposit account for a minimum number of years or, again, until a percentage of the equity is paid off.

Could I buy a house in trust for them?

This is certainly a possibility. The usual process is to create a trust – ideally before looking for a property - then loaning the trust the deposit. The trust takes out the mortgage to buy the property. One or both parents or grandparents must be trustees and also stand as guarantors (see above).

If you want to put a property you already own into a trust, the difference in value between what you paid for it and what it is worth at the time of the transfer could generate a chargeable capital gains tax event, even though no money has changed hands. There could also be inheritance tax implications.

There are a number of trust structures that could be used to hold the property and each of them comes with its unique advantages and disadvantages. So we recommend taking legal and financial advice around this could help you make the best decision for you and your family.

Here is a quick summary of the points covered so far:

Conclusion

The recent fall in house prices and the stamp duty holiday certainly feel like the ‘perfect storm’ for helping the next generation get on the housing ladder.

In the past this made the costs of buying a property cheaper for first time buyers, offering them the opportunity to put more towards a deposit and maybe even the chance to obtain a mortgage with a lower interest rate.

But that competitive edge could be eroded by the blanket holiday. Because all buyers are set to save, first-time buyers could face additional competition from buy-to-let investors or those looking for a holiday home.

We also need to face the fact that even at current prices, property can seem an unaffordable dream with the average house price representing ten times the average UK twenty-something salary of £22,880.

Buying a home is a major financial commitment and it’s important not to be rushed into making any decisions based on short-term offers or opportunities. Rather, make a calm decision with a long-term view in mind.