As I hurtle towards my 30s with alarming speed my thoughts recently have turned to the property market and making that giant leap on to the property ladder.
Having thought about the important matters such as what size garden did I want and whether the bathroom will be big enough, I thought I would turn my attention to probably the more pressing matters of a deposit. I therefore embarked on some research into this.
I thought that perhaps I was behind the times but having spoken to my friends and family, it appears that this may not be the case. A large percentage of them have either had help from parents or from an inheritance. According to insurers Royal London approximately 4million of the 17 million people aged 25-44 are in line to inherit from grandparents who have bought property.
In an ever changing market, and with political and economic uncertainty surrounding Brexit, it is proving more and more difficult for the younger generation to step onto the property ladder. The Guardian recently issued an article regarding a £400bn “wealth mountain”. Their article suggests that the majority of the people asked had plans to leave their properties to children and grandchildren in order to enable the younger generation to get a head start in life.
With property prices having increased significantly in the past few years many older generations are finding themselves in the fortunate position of having houses that have made a significant gain. However, with this comes tax implications such as Capital Gains Tax or Inheritance Tax on their death. Therefore, careful consideration needs to be taken when writing wills and taking tax planning advice.
A consideration that can be made should a parent or grandparent wish to secure their home is to make a gift of the property during their lifetime to their child or grandchild. Careful consideration does need to be given especially regarding the rules surrounding Gifts with Reservation of Benefit. As discussed in Jasmine’s recent blog "the boomerang gift", where a gift is made and a benefit is retained by the donor then this will have inheritance tax consequences on their death and the property or item will form part of the donor’s estate on death. A way to avoid this is to pay market rent (if the object of the gift is a property) to the donee. However, there is still a possibility that the gift will be investigated by HM Revenue and Customs.
A second way to gift a property is to leave a specific gift in a will. With the new residents nil rate band being implemented as of 6 April 2017 if a gift of a property is made in a will to a direct descendant then upon death a claim can be made for this relief. The current relief is £100,000. Kirsten’s blog discusses this in more detail.
Alternatively, there is the option of a cash gift. With mortgage lenders becoming stricter with their requirements, a larger deposit is often required for first time buyers. Therefore a gift of cash may be made by a grandparent or a parent. If this is done this will be a potentially exempt transfer and will be subject to the seven year rule. This rule deems that if a donor survives for 7 years or more the gift falls out of the donor’s estate. However, should the donor not survive 7 years then the gift will form part of the estate and may be subject to inheritance tax.
Should you require inheritance tax planning or advice on leaving gifts in will please contact our Tax, Trusts and Estates Department.