Chances are that if your children have recently left home, you have ideas about how to spend money freed up as household bills shrink and perhaps you’re planning a road trip or cruise.
But many empty nesters are finding adult children move back into the family home. In fact, 4.9million adults now live with parents, according to the 2021 Census.
It’s hardly surprising, given house prices are at a record high so the deposit banks require for a mortgage feels increasingly out of reach. Average private rents rose by 9.1 per cent in the 12 months to November to hit a record high of £1,319, according to the Office for National Statistics. Plus, rental costs are soaring, making it difficult for many to save.
Sometimes the only option to get your children a set of keys to their own property is for the Bank of Mum and Dad to help with a house deposit. An incredible £36 billion was gifted by loved ones for housing deposits in the past five years, according to new research from financial services firm SunLife. It surveyed more than 2,000 over-50s as part of its Life Well Spent report, which looks at major spending decisions, gifting and dream purchases.
One in five over-50s who have gifted money to family have done so to help with a house deposit.
This is equivalent to 1.2 million people; most are parents (91 per cent) while grandparents make up 8 per cent.
With the average amount given by those over 50 in the UK is some £29,033, the new data reveals stark regional differences.
The most generous over 50s in the UK live in Yorkshire and the Humber where deep pockets hand over an average £58,875 to family for a house deposit, according to SunLife. This region is closely followed by the West Midlands, where an average £55,716 is gifted, and the south west.
Buyers in Northern Ireland were gifted a huge £43,667 sum to help with their deposit.
However, the families in London gave just £21,333, which may not be surprising given it has the highest house prices in the UK so funds are tied up in property.
That may also explain the behaviour in over 50s in the South East – where house prices are also high – and the average given is £29,844. In the North East deposit gifts plummet to just £3,501 while families in the East Midlands gift £11,000.
Gifting as you approach retirement needs careful planning so here is our guide to avoiding the pitfalls and seeing your children settled.
Gift a cash deposit to get on housing ladder
Your child will not have to pay income tax on any lump sum you give them, but be aware the gift could trigger an inheritance tax bill later down the line
Generous parents with large cash savings or money tied up in shares may wish to simply gift their child or grandchild the money to kick-start their journey to homeownership. Most lenders allow gifted deposits but always check banks’ rules. Family friends or distant relatives such as cousins may not be allowed to gift a deposit, with lenders instead favouring close relatives such as parents, grandparents or siblings.
Any money you give a child or grandchild must be a true gift with no expectation of repayment.
In fact, the recipient will need to give their conveyancer a so-called ‘gifted deposit letter’ declaring the donor does not expect the money to be paid back.
The letter typically includes your details and your child’s, your relationship, the gift amount, where the money has come from, confirmation you have no stake in the property and proof you are financially stable.
Your child will not have to pay income tax, but be aware the gift could trigger an inheritance tax (IHT) bill later down the line.
A cash gift of any amount can be passed on free of IHT if the donor lives for another seven years, but should they die within seven years it counts towards your tax-free allowance of £325,000 (£500,000 if leaving your home to direct descendants). It means a gift could reduce the amount of your estate that can be passed on without incurring a 40 per cent bill.
Jordan Gillies, of wealth manager Saltus, explains you can use your £3,000 annual tax-free allowance to lessen the bill for your estate. Plus, you can carry over last year’s allowance if you didn’t use it to pass on as much as £12,000 tax-free as a couple. This can only be done for one year.
Consider splitting the deposit over two tax years if you are concerned about IHT and gift another £6,000 as a couple come April. This means £18,000 could be passed on tax-free in the next few months alone.
Gillies says life expectancy is important to consider when making substantial gifts. ‘If one person in the couple is younger or in better health, it makes sense for that person to make the gift,’ he says.
Dip into pension or sell share investments
You could think about withdrawing money from your pension to gift a house deposit if you are confident you have more than enough for retirement, says Charlene Young, of stockbroker AJ Bell
If your wealth is tied up in shares and you sell some to gift a deposit, you could also incur a capital gains tax (CGT) bill. CGT is payable on the profit after an asset such as a second home or shares has increased in value and then sold.
Investors have a tax-free allowance of £3,000 for assets outside of a trust. Gains over this are taxed at 18 per cent for basic rate taxpayers and 24 per cent for higher and additional rate earners. The rates were increased in the Chancellor’s October’s Budget. If you hold investments in an Individual Savings Account (Isa) you won’t have to pay CGT when you sell your shares.
You could also think about withdrawing money from your pension to gift a house deposit if you are confident you have more than enough for retirement, says Charlene Young, of stockbroker AJ Bell. ‘With the proposals to bring pensions into your estate for IHT purposes from April 2027 people might be thinking about spending their pension or changing the order in which they spend savings.’
If you’ve already taken out your 25 per cent tax-free lump sum then you’ll pay income tax – and a withdrawal might tip you into a higher tax bracket. If your child or grandchild is buying with a partner, it is worth them considering a deed of trust – a legal document which shows how the proceeds should be shared if the property is sold in the event of a split.
According to estate agent Haart, the deed can cost between £100 and £1,000, to be drawn up via a conveyancing solicitor.
A mum and dad loan affects affordability
If giving away thousands of pounds isn’t feasible, you could lend the money to your child – although this could limit their choice of mortgage deals. Also lenders view loans from family members in the same way as any other loan.
It could affect mortgage affordability calculations as repayments to you will be taken into consideration. Lilly Toop, of law firm Shakespeare Martineau, says draw up a loan agreement when lending to your children. You can use a template or ask your solicitor to help.
‘While this may seem uncomfortable when lending to a family member, it helps to ensure everyone is aware of the terms, to clarify repayment terms and provide legal protection for all parties.’ Brokers say the agreement should set out the repayment plan plus what happens if someone dies or your child defaults on repayments.
Ms Toop says if parents expect to have an interest in the new home they must tell the mortgage provider as this could incur additional costs.
‘The interest must be registered on the legal title, making it clear the parents would be entitled to money when the house is sold. The funds received from the sale will be liable for CGT on any gain over the annual exemption.’
Release equity from your own property
Shaun Moore, of wealth manager Quilter, says to only consider equity release if you have no other way of generating cash
Property-rich parents who want to help their child buy their own house could consider releasing equity from their home.
A lifetime mortgage allows you to release a tax-free lump sum from your home. The amount taken out is not repaid, along with the interest, until the property is sold but you can make repayments if you want to.
Katy Eatenton, of Lifetime Wealth Management, says: ‘This approach not only eases the financial burden for the next generation but also allows parents to witness the benefits of children receiving their inheritance early.’
She warns there are potential issues with equity release such as large amounts of interest building up, especially if you release equity as early as allowed at age 55. There are typically early repayment charges and the fee to release equity can be as much as £3,000.
Shaun Moore, of wealth manager Quilter, says to only consider equity release if you have no other way of generating cash.
Consult your financial adviser before taking any steps.
Start early save in a JISA – from birth
Instead of scrambling to stump up tens of thousands of pounds in one lump sum, you could save a little every year, beginning when your child is born.
Sylvia Morris, the Mail’s savings guru, says a junior Isa (Jisa) is a good bet. There’s no tax payable on capital gains or interest in these wrappers. Sylvia points out a stocks and shares Jisa tend to offer better returns compared to a cash Jisa. Your capital is at risk as the savings are invested in stocks.
If you funnel £1,000 every year from a child’s birth into a stocks and shares Jisa, the pot will be worth £29,539 by the time they are 18, according to calculations by AJ Bell. Compound interest does lots of the heavy lifting.
If this was converted to a stocks and shares Isa and left to grow, it would be worth £41,564 by the time they are 25, even if no more is invested. This assumes annual growth of 5 per cent after fees.
For the more risk averse, a cash Jisa could be a good choice.
Sylvia’s top pick is from Coventry Building Society, which pays 4.50 per cent. You can deposit up to £9,000 a year in Junior Isas.
Savings accounts are more accessible, but interest is not always tax-free, unlike in a Jisa.
Grandparents making regular gifts each year to build a housing deposit could use the gifts out of the normal expenditure rule if they are concerned about IHT, Gillies explains.
You can make regular gifts without attracting inheritance tax – so long as payments do not affect your standard of living and are made out of income, and not existing capital. This could be savings interest or pension annuities. Gillies warns you need to clearly prove the gifts meet this criteria. A letter to the beneficiary setting out how much and how often you intend to gift is a good measure to have in place.
Or don’t pay a penny – prompt them to save
If you prefer not to give away your hard-earned cash, nudge your children to build their own deposit.
They can set up a Lifetime Isa (Lisa) to pay up to £4,000 and get a 25 per cent boost from the Government. This can only be used for buying a home worth £450,000 or under, or can be cashed in at 60 for retirement.
Encourage them to set aside money for a deposit as soon as payday arrives each month and prompt them to build their credit score to qualify for the best mortgage deals.
But a financial gift is likely to boost your spirits, too, as some four in five of those who have helped a loved one buy their own home say it increased their overall happiness, according to Mark Screeton, chief executive at SunLife. Gifting a deposit may hurt your bank balance but helping your children with such an important life step may give you great satisfaction.
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