The primary challenge for parents wishing to lend or gift money to their children to help them buy their first home, is to decide how best to do it. It’s really important that parents consider their own financial future before thinking about helping others. Taking financial advice will help them do so in the most tax-efficient manner for their circumstances and consider the likely effects on their retirement plans.
Tax considerations
Parents can gift any amount of money to their children without being taxed immediately. However, there may be Inheritance Tax (IHT) implications. Giving a child more than £3,000 in a tax year means that the money will be classed as a ‘potentially exempt transfer’ and if the donor dies within seven years, the money will be considered part of their estate for IHT purposes, which may have an impact if their estate is then worth more than £325,000 and is not all passing to a surviving spouse. The normal 40% IHT rate tapers down to 8% during the sevenyear period.
However, a gift of up to £3,000 a year is exempt from IHT, as is a gift of £5,000 made when a child marries. It’s also possible for a parent to make regular gifts out of their income provided that this doesn’t affect the parent’s standard of living and other criteria are met.
Lending rather than giving
Some parents prefer to give all or part of the money as a loan. In this case, it is worth drawing up a contract outlining what the repayment terms are to be. Not only does this prevent future disputes as to whether the money was a loan or a gift, it also means that the parents know when they will see the return of their cash. If a parent loans their child money, and the child pays interest to the parent, then this is taxable.
The Financial Conduct Authority does not regulate some forms of taxation advice.