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Case Study: Helping your loved ones to buy a first home

Case Study: Helping your loved ones to buy a first home

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This case study shows how a grandparent can help their grandchild to climb onto the property ladder by providing them with the money to invest for a deposit.

Camilla, 72, is concerned that her grandson Alex, 25, is struggling to get on to the housing ladder. Together they have chatted about the difficulties Alex is having saving a deposit – given the high rent he pays he’s not really managing to save anything at all.

Camilla has decided to give Alex a helping hand and considered what money she can spare. They have agreed that she will gift Alex £4,000 a year out of her own income and that Alex will invest that money into an ISA earmarked for a house deposit.

The plan

  • A flat in Alex’s local area costs around £200,000.
  • In the current market Alex will need a deposit of at least 5% to get a mortgage (£10,000). However, to make his monthly mortgage repayments more affordable, and increase his choice of mortgage options he would like to put down a deposit of 10% (£20,000).
  • Alex could put his grandmother’s yearly £4,000 gifts into a cash ISA. But based on current low cash ISA rates[1] it would take nearly five years[2] to reach his goal.
  • Invest the money in a stocks and shares ISA and Alex’s house-purchase fund could potentially grow faster. This could cut the amount of time it will take to get on the housing ladder.
  • However, the stock market can be a risky place in the short term. As Alex should be able to reach his target in five years or less, investing in a stocks and shares ISA doesn’t seem appropriate.
  • An alternative option is a Lifetime ISA, which is designed to help younger adults to save for retirement or build up funds towards the purchase of a first home.
  • Anyone aged between 18 and 40 can open an account and make contributions until their 50th birthday.
  • As with standard ISAs there are cash as well as stocks and shares versions.
  • In the current market, cash LISAs pay interest rates of only around 1% a year[3]. But the government adds a 25% bonus to LISA contributions.
  • For every £4 saved the government adds £1, which means a maximum bonus of £1,000 on the annual £4,000 limit.
  • If Alex invests the £4,000 his grandmother gifts him each year in a cash LISA, with the help of the government bonus he could reach his £20,000 target in a less than four years[4].

Three years on

  • Thanks to his grandmother’s assistance, Alex is now living in a home of his own.
  • Camilla’s generosity has had other benefits, reducing the size of her estate for inheritance tax purposes.  Unlike other gifts, which might only be exempt from IHT after seven years, because the sums gifted by Camilla come out of her “surplus income” and do not affect her standard of living they fall out of her estate for IHT purposes immediately.

 

 

[1] Source: Moneyfacts.co.uk: Best instant access rate 1.65%, 30 May 2019.

[2] Source: Brewin Dolphin.

[3] Source: Moneysavingexpert.com: Lifetime ISAs, 4 June 2019.

[4] Source: Brewin Dolphin.


The value of investments can fall and you may get back less than you invested.

Past performance is not a guide to future performance.

No investment is suitable in all cases and if you have any doubts as to an investment's suitability then you should contact us.

Please note that this document was prepared as a general guide only and does not constitute tax or legal advice. While we believe it to be correct at the time of writing, Brewin Dolphin is not a tax adviser and tax law is subject to frequent change.  Tax treatment depends on your individual circumstances; therefore you should not rely on this information without seeking professional advice from a qualified tax adviser.

Brewin Dolphin does not provide mortgage advice.

Brewin Dolphin Limited is authorised and regulated by the Financial Conduct Authority.

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