How to help children onto the property ladder

Soaring house prices over the last decade mean that getting a foot onto the property ladder can be very difficult for the younger generation. The average UK house price stood at £294,329 in December 2022 – that’s 74% higher than ten years previously¹. Over the same period, median annual earnings have risen by only 25%².

As a parent or grandparent, it’s only natural to want to provide financial support. But after a year of high inflation and stock market volatility, it’s really important to consider whether you can still afford to help out and, if so, how to gift money in a way that doesn’t undermine your own financial security.

 
To help you get started, here are some of the key considerations.

Consider the impact on your long-term finances

Before you give any money away, it’s vital to understand how this could affect your own long-term finances and retirement prospects. The economic backdrop has changed significantly, so the financial contribution you can afford today could be very different to what you could afford 12 to 18 months ago. Day-to-day living expenses have increased considerably, and stock market volatility may mean your investments haven’t performed as well as you hoped; both of these could be putting increased pressure on your retirement savings.

The best way to understand how much you can afford to contribute to your child or grandchild’s house purchase is to speak to a financial adviser. By using cashflow modelling, they’ll demonstrate how long your money is likely to last based on your existing plans, and then show how this would be affected if you were to put money towards your child’s mortgage deposit. That way, you’ll feel more confident that any money you decide to give away won’t diminish your own financial security.

Think about where to draw money from

A common way of helping children or grandchildren to get onto the property ladder is to give them a lump sum of money, which they can then put towards a mortgage deposit. The simplest way to do this would be to use cash savings, although it’s important to check your savings accounts don’t charge any exit penalties.

If you don’t have enough cash savings, another option is to sell some of your investments and then gift the proceeds. Your investment manager will be able to advise on whether this is a good time to sell your investments and which holdings in your portfolio are most appropriate to sell. If you sell investments that have risen in value, you might have to pay capital gains tax (CGT) at up to 20% on the profits. You can mitigate CGT by using your annual CGT exemption, although this is being slashed from £12,300 in the 2022/23 tax year to £6,000 in 2023/24 and then £3,000 in 2024/25.

Gains on investments held inside an ISA wrapper are exempt from CGT, so selling investments in your ISA could be an alternative option. Under flexible ISA rules, it’s possible to withdraw money and then pay the same amount back in again without it affecting your ISA allowance, as long as this occurs in the same tax year. Your financial adviser will be able to explain whether this option is available to you.

If you’re coming up to retirement, you might be tempted to use your pension tax-free lump sum to help your children onto the property ladder. However, it’s really important to understand the impact that a large withdrawal could have on your pension. Taking too much money at the start of retirement could mean you have to make cutbacks in the future to avoid running out of money.

Understand your tax position

There are complex rules around how gifts are taxed. If you don’t plan ahead, you could end up leaving your children or grandchildren with a big tax bill, rather than the financial boost you were intending to provide.

Each tax year, you can give away up to £3,000 worth of gifts tax free. This is known as your annual gift exemption. Any unused annual exemption can be carried forward by one tax year, so if you didn’t use your annual exemption in the 2022/23 tax year, you could carry the whole lot forward to the 2023/24 tax year. That means a couple could potentially gift £12,000 to a child tax free in a single tax year.

If you make a gift that is bigger than your annual exemption, it is known as a ‘potentially exempt transfer’; this will be tax free as long as you live for at least another seven years. Otherwise, it could reduce your inheritance tax (IHT) nil-rate band (currently £325,000) and restrict the amount of money you can pass on to your beneficiaries tax free when you die. What’s more, if you gave away more than £325,000 in the seven years before you died, you would not only eliminate your nil-rate band, but IHT would be payable on gifts above this threshold.

An adviser can help you understand your IHT position, so that any money you put towards your child or grandchild’s first home doesn’t result in an unexpected tax bill.

Plan ahead with a Junior ISA

If your children or grandchildren are still young, you could consider investing in a Junior ISA rather than waiting until they’re older and handing over a large lump sum. Investing little and often may feel like a more manageable way of helping children onto the property ladder. You can invest up to a maximum of £9,000 a year per child. Investment growth is tax free, meaning more of your money goes towards their future. And if you set up regular payments (such as monthly or yearly) which come out of your regular income, these will be exempt from IHT so long as your lifestyle isn’t adversely affected by the payments. 

Next steps

Understanding how to make a meaningful contribution to your child or grandchild’s future without undermining your own financial security isn’t always easy. A financial adviser can explain your options and advise on the best course of action for your individual circumstances, so you feel confident you’re making the right decisions for you. Because good decisions follow smart advice.