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As 2023 approaches, you may be fixing your eyes at the horizon, looking at what’s next. You could have plans to help your children and grandchildren get along in life – including handing over some of your hard-earned wealth.
If you plan to boost adult children onto the property ladder in the coming year, you are set to become what we call “the Bank of Mum and Dad” (or Grandma and Grandad).
Indeed, parental help for first-time buyers has increased significantly since the start of the century: YouGov research confirms that, between 2015 and 2019, 31% of first-time buyers had help from family, compared to just 13% at the start of the millennium.
As wage growth stagnates in comparison to house price growth, more and more hard-working young people may need a helping hand from older family members if they want to own a home.
Although you may be happy to help, you could also have concerns and questions about the implications of handing over a large sum to the next generation.
So, read on to find out four key things you need to know about becoming the Bank of Mum and Dad (or Grandma and Grandad) in 2023.
1. Interest rates could continue to rise in the first half of 2023
As you may already know, the Bank of England (BoE) has raised the base rate nine times since December 2021, bringing it from 0.1% to 3.5%.
These increases have come as a response to rising inflation, which reached a 40-year high of 10.7% in November 2022. A BoE Monetary Policy Report, published in November 2022, states that “further increases in bank rate may be required for a sustainable return of inflation to the target of 2%”.
So, if you are helping your kids onto the property ladder in 2023, it may be prudent to prepare for higher interest rates on any mortgage they take out.
This could mean that to afford the home they want, your children could ask you for a larger deposit contribution than they had planned.
2. You don’t just have to hand over a deposit – you could help with the mortgage instead
When deciding to help the next generation onto the property ladder, you may assume gifting a lump sum for their deposit is the only way forward.
Yet in actual fact, you could decide you’d rather help with the mortgage itself. New mortgage products come onto the market all the time, and some of these different options could be an attractive alternative to giving a lump sum.
Some mortgage options you could help your children or grandchildren with include:
Signing on as a guarantor, meaning you agree to take on your child’s debts if they become unable to repay
Taking out a “family springboard mortgage”, also known as a “family mortgage”, involving you, the helper, placing funds in a secure account for five years, and having them returned with interest if the mortgage holder (your child) proves able to repay the debt
Taking out a joint mortgage, which could be helpful if your child is buying as a single person, rather than with their partner or spouse.
Fortunately, if you are uncomfortable about gifting a large lump sum, exploring mortgage options could be a viable alternative for you and your loved ones.
Of course, rising interest could have an impact on the type of mortgage you are able to take out, either as a joint owner, guarantor, or family “helper”. Working with us here at Atherton York can help you assess the affordability criteria before you secure a mortgage with the younger generation.
3. You should assess whether you can afford to gift the amount you’ve promised
No matter how you plan to help, there is of course the question of affordability to consider.
You may have been saving for years in order to help your kids become homeowners, but the UK’s recent economic landscape could have caused you significant concern about whether you can afford to give what you’ve promised.
High inflation, rising interest, and Ofgem’s lifting of the energy price cap meant that for most people, 2022 was more expensive than they’d hoped.
Plus, your investment portfolio might have experienced some unpredictability, after various forces – including the Ukraine war and the effects of Covid-19 – caused markets to become volatile.
Luckily, working with a financial planner can help.
We can assess your financial situation in the new year and help determine how much you can afford to give the next generation in the immediate future. Using cashflow modelling software, we can map out your potential future expenditure and income, so you are fully aware of your wealth situation before you gift a large sum.
No matter what you choose to do, we are here to ensure you have confidence in your choices.
4. Gifting large sums could increase your tax bill
It’s important remember that, when gifting large sums of money to any individual, this transfer of wealth is not always tax-free.
As of the 2022/23 tax year, you can give up to £3,000 to any individual, or split the sum between multiple people, and this will fall outside your estate for Inheritance Tax (IHT) purposes.
Additionally, payments above £3,000, known as “potentially exempt transfers” (PET)s, could be made without incurring an additional tax charge. However, if you were to die before seven years have passed after the date the gift is made, your beneficiaries could pay IHT on the sum.
The amount of IHT they could pay is tapered, decreasing for each year that passes after the gift is made.
The below table shows the amount of IHT your loved ones could pay on gifts over £3,000 if you were to pass away fewer than seven years afterwards.
Source: HMRC
Remember, taper relief only applies to gifts in excess of the nil-rate band. It follows that, if no tax is payable on the transfer because it does not exceed the nil-rate band (after cumulation), there can be no relief.
Taper relief does not reduce the value transferred; it reduces the tax payable as a consequence of that transfer.
Notably, your tax situation could already be changing in 2023. The chancellor’s 2022 autumn statement has pushed thousands more earners into the additional-rate tax band.
Plus, some tax-efficient allowances, such as the pensions Lifetime Allowance (LTA), the Capital Gains Tax (CGT) annual exempt amount, and the Dividend Allowance, will either remain frozen or be decreased in the coming few years.
So, it is important to work with your financial planner when gifting a large sum for a property, in order to make the transfer as tax-efficient as possible.
By working with a professional here at Atherton York, you can help keep costs low and explore all the options available to you when boosting loved ones onto the property ladder.
Get in touch
For trustworthy guidance on becoming the Bank of Mum and Dad (or Grandma and Grandad), email info@athertonyork.co.uk or call us on 0208 882 2979 for more information.
Please note
This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
The Financial Conduct Authority does not regulate estate planning, tax planning or will writing.
Remember that taper relief only applies to gifts in excess of the nil-rate band. It follows that, if no tax is payable on the transfer because it does not exceed the nil-rate band (after cumulation), there can be no relief. Taper relief does not reduce the value transferred; it reduces the tax payable as a consequence of that transfer.
Your home may be repossessed if you do not keep up repayments on a mortgage or other loans secured on it. Buy-to-let (pure) and commercial mortgages are not regulated by the FCA.
Think carefully before securing other debts against your home.