Wealth structuring is certainly not the preserve of the ultra-wealthy, and there are a number of strategies families should consider to ensure that their wealth has maximum benefit for generations to come.
Rocketing house prices, lacklustre wage growth and tougher lending conditions mean that helping children – or grandchildren – get onto the property ladder is now very much the norm. It is essential to understand the implications of all your options for doing so, however, particularly as regards tax.
The rise of the “Bank of Mum and Dad” as a prime mover in the UK housing market is one of the biggest socio-economic stories of our time. According to L&G, contributions of £6.5bn last year made it equivalent to the ninth biggest mortgage lender in the UK and the trend shows no sign of slowing down. Over 2018, it is expected that 27% of home-buyers will receive help from family or friends, with the average parental contribution hitting a substantial £18,000.
Of course, it is natural for parents and grandparents to want to help the younger generations find security and comfort if they are financially able. Ever-rising house prices and the fact that renting puts many couples off starting a family add an even greater sense of urgency to the situation. You may also be thinking about saving on tax through giving inheritances early. But while these are all laudable aims, it is vital to think things through carefully. There are several ways to help family onto the property ladder and a number of potential pitfalls to avoid – not least harming your own financial security or unwittingly causing family discord.
Your first obligation is to give serious thought to your own financial security before gifting or loaning any money to children or grandchildren. You may feel quite well-off now, but have you thought about the sustainability of your retirement income given that people are living much longer than previously today? The spectre of care costs also looms large as we look ahead to a time when rates of cognitive decline far outstrip government provision for care.
You must next consider the assets you would potentially access, since your wealth is likely to have been built through a mixture of property, savings, pensions and other investments. Each has a different liquidity profile and carries its own tax implications, so you may find it more efficient to look beyond your initial assumptions.
More broadly, you must be firm in your intentions and ensure that these are well-known to the recipients of the funds – and perhaps the wider family too. If you plan to lend money then you may want to formalise a repayment agreement to guard against changing circumstances. Likewise, if you fear money intended for a property might go astray then perhaps think about releasing monies only when one is found.
More broadly, don’t underestimate the effect a large loan or gift might have on relationships if other family members feel like they are not being treated fairly. If, for example, an inheritance is being gifted early to one sibling but not to a better-off other, then wills may need to be altered to formally reflect that fact.
For those nervous about parting with large sums, an “entry level” option is to enter a guarantor mortgage (whereby you offer to secure home repayments in case of default). A number of institutions now offer specialist mortgage products like this, so do shop around for the best terms (also bear in mind that private banks often offer wealthy individuals far more tailored mortgages than High Street lenders).
Most affluent individuals are likely to be looking for more proactive ways to deploy their wealth, however, and each of the options below might convey significant benefits depending on your family circumstances.
A part-purchase could be a good option for those still looking to build up their investment portfolio with equity in another property – and can also be a way to help protect your funds. Be aware, however, that this choice carries complexities around how the property’s ownership is structured. It could also create extra tax liabilities, particularly as regards Capital Gains Tax (CGT) and Stamp Duty Land Tax (SDLT), as this house would constitute a second property.
An outright gift is probably the most tax-efficient method since – assuming you live for seven years afterwards – this sum will not form part of your estate for Inheritance Tax (IHT) purposes (even if you die before this period then tapered reliefs may apply). However, gifts may be treated as matrimonial assets in the event your children or grandchildren get divorced, risking the loss of this family wealth.
A private loan
You could opt to lend the money, with or without interest (but in the former case bear in mind that income tax may be chargeable). Written agreements are vital with loans, as is recognising their tax implications. Outstanding monies would form part of your estate upon death, for instance, while later deciding to waive a loan starts the seven-year gifting clock ticking for IHT purposes.
Establishing a trust
Putting funds into a trust which will in turn give or lend funds to your children or grandchildren may convey significant IHT benefits as the monies settled will fall outside of your estate after seven years (an immediate IHT charge may apply if you transfer more than your individual or couples allowance of £325,000 or £650,000, respectively). Your choice of a discretionary or life interest trust has implications for the SDLT rates applicable, however, and bear in mind that trust assets exceeding the nil rate bands may be liable for their own IHT charges every decade.
As we have outlined, each of the ways you might help family onto the property ladder has benefits and disadvantages that might be more, or less, applicable depending on your circumstances. It is crucial to look at your wealth – and that of the family – in the round, and to take professional wealth management and legal advice before making any big decisions.
If approached wisely, you can certainly help children or grandchildren get onto the property ladder in such a way that your own financial security – and family harmony – can be preserved. As with all matters of managing wealth, planning ahead and taking a measured view of all your options is the key.
Helping to structure family wealth efficiently is very much core business for the institutions on our panel. If you would like an informal discussion of how they could assist with your particular needs, please get in touch with our expert team.