Before we discuss gifting to our children or grandchildren, it is a good idea to seek professional advice about what you can give away tax free during your lifetime.
There are numerous ways in which you can raise funds to help the family. Each of which has positives and negatives, always seek independent advice and make sure you know all the pros and cons.
The importance of the bank of Mum and Dad
The Bank of Mum and Dad now supports nearly half of all first-time buyer purchases, but not all parents have the financial security to support their children. Research from the Institute of Fiscal Studies revealed in December 2023, that half of people in their 20s who buy a new home, get help from their parents. As outlined in this article (video) (https://ifs.org.uk/articles/how-important-bank-mum-and-dad).
Paul Johnson Director of IFS, revealed that the striking fact that the big reduction overall in home ownership in the past 20 years has been driven by young people whose parents are not terribly well off. In those circumstances the parents can’t help because they don’t own a property.
Here is what Mr Johnson has to say:
“We’ve all heard of the so-called Bank of M and Dad and research here recently at the IFS shows just how important that is.
About half of people in their 20s for example, who buy a new home get help from their parents to do so. What’s even more striking is that the big reduction overall in home ownership that we’ve seen over the last 20 years or so, has been driven almost entirely by young people whose parents are not terribly well off parents who can’t help them. Because they don’t themselves own a property so that collapse in home ownership has been very much down to those young people whose parents are not themselves homeowners.
If your parents are homeowners there’s been a much smaller drop in the chances that you yourself will buy a home. This really matters for all sorts of reasons partly it helps people get onto the housing ladder. It helps people put on bigger deposits if you can buy a more expensive house. Then that increases your wealth in the long run if you got a bigger deposit, then of course you’re paying less interest on your mortgage and that also increases your wealth in the long run.
So these, what can sometimes be relatively modest gifts from parents can make a big difference to how well off people are in their lives and this is particularly important, (and becoming more important) because there is more wealth held by that older generation. So more to come down to the younger generation, and earnings among the younger generation have stagnated making those gifts and inheritance is even more important for them in terms of their lifetime well-being.” watch the video.
Homeownership
Research from house builders Avant Homes, revealed that as of July 2023 50% of UK adults owned their own home 1. Compared to periods spanning 2016 to 2018, where UK Government statistics revealed that 63% owned their own homes 2. Meaning the ability for offering inheritance or gifting from homeowners is reducing.
Bank of Gran and Grandad
Grandparents increasingly support their grandkids financially, from covering university fees to funding a deposit on a home. Recent Aviva research found that one in four grandparents have, or are going to, help grandchildren become first-time buyers.
Unlocking property wealth
You might have the ready cash to gift to your grandchildren but, if not, a lifetime mortgage allows you to unlock equity tied up in your property. However, make sure you’re aware of the benefits and drawbacks of gifting money to grandchildren and that you understand any equity release products you’re considering.
Once again, any consideration in terms of raising funds from equity in your property must be subject to independent advice. You may be extending the terms of any debt and be increasing the total amount you repay. Not to mention the actual rate and fees charged (as well as other lender and solicitor fees) will depend on your circumstances. So, it is important to receive a personalised illustration.
Alternatives to Equity Release
There are several alternatives to consider:
Downsizing is one option, where you sell your current home and move to a smaller, less expensive property, freeing up cash in the process.
Renting out a room or property can provide a steady income stream.
If you’re of pension age, you might be able to take advantage of pension drawdowns or annuities.
Another option could be to take out a secured loan or mortgage, although this would require making regular repayments.
You can also look at government benefits or grants that may be available for certain individuals, particularly those with low incomes or specific needs.
Whatever you consider, it is important to carefully consider all options and seek professional advice before making any decision.
Benefits of Gifting
- Get to see your grandchildren enjoy your gift now
- Take the financial pressure off your own children
- Potential inheritance tax benefits (but you should seek professional tax advice)
- Unlock property wealth without needing to make repayments with a lifetime mortgage
Potential drawbacks
- Gifting large sums will reduce the amount you pass on to your estate on your death
- Gifting could have implication regarding future long term care funding should you require care in the future
- An equity release mortgage may not be the cheapest way to borrow over the long-term, so take independent financial and legal advice
- A lifetime mortgages is a loan secured against your home and subject to compound interest meaning the amount your owe can grow quickly
- Helping your grandchildren could impact your own finances. Make sure you have enough left to fund your own living cost
Talk about this
If you’re considering a gift to family and loved ones, we recommend booking an appointment with one of our independent advisers. To book an appointment you can call us on 0800 043 0725 or you can request a call back here.
