These blogs are written by third party guest authors to help provide additional insight and perspective.
Next up in our later life mortgages and borrowing series is a post kindly supplied by Danny Clifford – Tax & Trust Partner, at Ensors Chartered Accountants.
The escalation of house prices over several decades is good news for homeowners but can be problematic for those looking to enter the housing market. The average house price in the East of England is now about £310,000.
Lenders may be willing to lend anything between 60-95% of the value of the property, however, generally speaking, the higher the proportion loaned, the higher the interest rate. It is typically best therefore to be able to put down as big a deposit as possible and keep the borrowed sum, and therefore the interest rate, as low as possible.
Consider someone looking to get on the housing market who is considering the purchase of property valued at £250,000. The minimum deposit they might contemplate could be 10% - some £25,000. A 20% deposit could ease the pressure on the interest rate further and allow for a greater reduction in the value of the property before negative equity became an issue - but that means finding £50,000 as a deposit!
Even finding £25,000 is a not inconsiderable feat for someone who is possibly already renting a property and is at the start of their career. In many cases salvation comes in the form of the “Bank of Mum and Dad”.
Many parents, if they are able to do so, are happy to help their child to get a foot on the property ladder, but what is the tax effect, if any, of gifting £25,000 to your child by virtue of putting a deposit down on a property?
The first point to make is that the tax relevant to a gift of cash is Inheritance Tax (IHT).
The second point is that, more likely than not, there is not going to be an immediate tax charge associated with making a cash gift to another person.
Although unlikely to cover a gift of £25,000, there are some specific exemptions that may apply.
The first £3,000 gifted by a person in a tax year is exempt, and if no gift was made in the previous tax year then the exemption can be carried forward (one year only) to give a £6,000 exempt amount.
It follows that if there have been no previous gifts (to anyone) made by the parents in the previous tax year (or in the current tax year to date) and each parent now gifts £6,000 to their child, a total of £12,000 can be gifted tax free.
There are also additional exemptions available for smaller gifts and gifts in consideration of marriage by a parent (£5,000).
So, with planning it would be possible to transfer amounts to the child over a period of years such that they have the funds available themselves in order to make the deposit when needed and the gifts are covered by the above exemptions.
However, more usually the deposit is to be funded in one lump – that is to say the child finds a house and the parents agree to fund the deposit. Does that cause a IHT problem? The answer is, usually, no.
Clearly this cannot be fully covered by the above exempt gifts, so what is the position when the gift is not exempt?
Where the gift is made during the donor’s (in this case the parent’s) lifetime (as opposed to via a Will on death) the IHT rules apply such that the transfer is deemed to be ‘potentially exempt’.
There is no immediate tax charge due on such a transfer and, if the donor survives the gift by 7 years then there will be no tax charge at all. Because the gift is not exempt until the donor has survived 7 years it is, when it is made, only “potentially exempt”.
Should the parent not survive 7 years from the date of gift the amount gifted will fall into the parent’s taxable estate on death. However, when calculating the IHT due on an individual’s death estate the IHT nil rate band of £325,000 is allocated first to lifetime gifts made in the previous 7 years before death (and to the chronologically oldest gift first). So, if the only lifetime gift made by the parent was a £25,000 house deposit for their child made 6 years before the parent died, that gift would utilise the first £25,000 of the parent’s nil rate band. The result is that there is no tax due on that gift, but the nil rate band to be set against the rest of the taxable estate is reduced to £300,000.
In summary therefore, it is usually possible to gift a house deposit to a child without there being any tax consequences of that specific gift, provided it is not necessary to sell any asset to realise the necessary cash.
However it is always worth taking professional advice if you are in any doubt as to the position.
The above is to give a general appreciation of the tax consequences of making a cash gift to an individual only and no action should be taken without taking further specific advice.
Based on legislation and rates in force at the time of writing (July 2021).
Guest post supplied by Danny Clifford, Ensors Chartered Accountants. By publishing and hosting information from guest authors on the Ipswich Building Society website this does not constitute an affiliation with, nor a recommendation of, any third party organisation. We recommend that if the content of this article applies to you, or if you require further information on the particular topic it raises, that you seek specialist advice.