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This article is for general guidance only and is not financial or professional advice. Any links are for your own information, and do not constitute any form of recommendation by Saga. You should not solely rely on information in this article to make any decisions, and always talk to a qualified professional or service for your own particular situation - but once you've read it, you'll be in a much better position to have those discussions with the professionals. All information in this article is correct at the time of publishing, but laws, entitlements, tax treatments and allowances may change in the future.
As younger people struggle to buy a home of their own, parents and grandparents are doing their best to give them a little helping hand.
The Bank of Mum and Dad – and increasingly, Grandma and Grandpa – is helping with deposits, loans, guarantees and other forms of financial support for younger generations.
It’s no surprise that, as they struggle with student debt, rising taxes and the sky-high rents that tenants must now pay, nearly two thirds of first-time buyers needed help from family to hop onto the property ladder in 2023.
Of course, some parents are taking a different approach: buying a property of their own and renting it out to their children. There are a good few options out there, with many different benefits, but remember: there are also a few pitfalls.
If you want to help a child or grandchild buy a home, or just give them somewhere affordable to live, you will need to examine all your choices carefully to avoid a rather nasty financial surprise later on.
Perhaps the most straightforward thing to do is give your children or grandchildren money towards a deposit on their first home.
The goal is to boost borrowing power – if you need a smaller mortgage, you’ll generally get a better rate from lenders as you’re seen as a lower risk. You’ll also be paying less in interest over the course of the mortgage, so the more deposit you can arm your family with, the better.
But giving money away might not be as simple as it first seems, because there’s a risk it could become liable to inheritance tax (IHT) at a later point.
Now, it’s vital to know the rules, to avoid coming unstuck at a later date - but like everything to do with tax, these rules can be complex.
Before we get into that, it’s important to check whether you’ll actually have to pay IHT, as between 2020 and 2021, only 4% of deaths resulted in inheritance tax . You can use MoneyHelper’s guide to brush up on the scenarios where you’re liable to pay anything, and if you’re in any doubt, do get advice to help your understanding.
If you do find the value of your estate means some of it is liable for IHT, then any money you gift is only guaranteed to be entirely IHT-free if you live for another seven years after giving it.
These are known as ‘potentially exempt transfers'. If you die within seven years the gift will be deemed a ‘chargeable transfer’ and be counted as part of your estate when calculating a potential IHT bill.
These gifts may not be taxed at the full rate of 40% rate though. The IHT rate will reduce on a sliding scale depending on how long ago you gave them before your death, known as taper relief.
On top of this, everyone can give away up to £3,000 each per tax year that will immediately be free of IHT.
That might not make much of a dent in a house deposit, but couples can combine their allowance to gift £6,000 in total.
Plus, if you didn’t use this allowance in the last tax year (remember, in the UK this runs from April 6, to April 5 the following year) you could use that too, doubling the amount you can give tax-free to a better-sounding £12,000.
To be IHT-free, all gifts need to be “absolute”, says Helen Thornley, technical officer at the Association of Taxation Technicians. “You cannot include a provision to recover the money later. It’s a case of ‘once it’s gone, it’s gone’.”
Thornley adds: “Keep records of gifts including the date, amount and, for married couples, whether it is a joint gift or just from one spouse. Whoever is completing probate for your estate will need this information to make a full and correct disclosure to HMRC.”
Another concern may be gifting money to a beloved child or grandchild and their partner, only to see they go their separate ways later. In this case, some of the money could end up going to their ex, which might be especially galling if you didn’t have the best relationship with them.
You can get round this by writing a declaration of trust , which sets out who the money was gifted to, and who should retain it following a breakup. If the couple later gets married or have children, you can adjust this if you wish.
In a lesser-known exemption, regular gifts paid out of extra money you have coming in may also be IHT free.
This is potentially the “most powerful gifting option” of all, says Thornley. Instead of gifting a lump sum, you could help with mortgage repayments – perhaps for a set period - to get your family started on the property ladder.
“There is no limit to the sums that can be given tax-free, provided they come out of your income rather than savings, are made regularly and do not affect your standard of living ,” Thornley says.
But it’s essential to take advice and document the arrangement. “HMRC may want proof that the gifts were out of ‘excess’ income that you weren’t otherwise spending,” she adds.
If you’re intending to give money to help with a deposit, a mortgage lender may want written confirmation that any money you hand over is an outright gift , and does not need to be repaid. But what if you’re worried that you’ll need that money back at a later date?
Well, you can lend the money but, again, you need to tread carefully, by drawing up a loan agreement setting out how much interest – if any – you will charge, and when the money should be paid back.
The agreement should include important details such as what happens if you or the recipient dies, you go into long-term care, or need the money in a financial emergency.
Note that if you do charge interest, this will need to be declared as additional income to HMRC.
Now, as mentioned, many mortgage lenders may not accept a loan, insisting that the deposit needs to come from a non-repayable source such as savings or a gift.
Others will accept it, but loan repayments must then be factored into mortgage affordability calculations , reducing the amount you can borrow.
A mortgage broker can recommend the lenders that can help best in this scenario, should you decide that you’ll need to recover the money from your family at a later date.
Another option is to take out a family offset mortgage, which allows you to use your savings to reduce the interest on the mortgage, without actually handing over your cash.
Angela Kerr, director of the Homeowners’ Alliance, says the parent typically puts cash worth between 5% and 20% of the property’s value into a special savings account linked to the buyer’s mortgage.
“They agree to leave the money there for a [defined] period, or until the amount owed on the mortgage falls below a certain threshold.”
Another option is to raise some money by remortgaging to access the equity that has built up in your home. That money can either be gifted or lent to your children or grandchildren.
The downside is that doing so could cause your repayment costs to go up, which could hit your own standard of living.
If you’re older and no longer working, you might find the number of lenders willing to help remortgage your home is reduced as well.
Some lenders offer guarantor mortgages, which allow younger borrowers to get a cheaper loan, because an older family member or friend guarantees to keep up mortgage repayments if they can’t afford them.
Typically, the parent uses their own home or cash savings as collateral , which can be called upon if the young buyer falls behind on their monthly repayments.
This allows your child to borrow more, because you are likely to have a higher income and better credit score through a longer track record of borrowing.
However, it does mean that you will have to step into the breach if the family member runs into financial difficulties and is unable to make repayments on the mortgage.
It is wise to take professional advice before entering into this agreement, to ensure you’ll be able to provide support throughout the mortgage – otherwise your credit score, property or savings may well be on the line, too.
As a guarantor, your savings could also be locked away during the agreement, meaning years without access to the cash, so do be sure you can live without it.
Typically, guarantor mortgages charge slightly higher rates of interest than standard deals, so this may not allow you to help your family member borrow as much as they might expect.
Another option is to take out a mortgage in joint names, with both you and the young buyer appearing on the title deeds.
Your combined incomes could allow you to borrow more money and because you have a stake in the property, you have more say over what happens to it.
As ever, there are downsides. First, you will be equally liable for the mortgage repayments, and will have to plug the shortfall if your child is struggling to pay their share – so ensure you’ll be able to provide backup for the length of the mortgage.
Your credit score will be affected if any monthly payments are missed, while your own home could be at risk in more extreme cases.
Another issue with joint purchases is that the child may no longer be able to claim first-time buyer stamp duty relief - available on property purchases up to £625,000 at the time of writing - that they intend to use as their main residence.
If your name is on the deeds, and you already own another property , you could have to pay a 3% stamp duty surcharge imposed on buy-to-lets, second properties or holiday homes on top of any stamp duty already due.
Finally, if your name is still on the deeds when the property is sold, you could also face a capital gains tax (CGT) bill on any profit.
You may be able to get round some of these issues by taking out something called a joint borrower sole proprietor (JBSP) mortgage.
This works like a standard joint mortgage, so both you and your child’s names appear on the lending agreement, but your child will be the only one named on the property deeds.
This way they should avoid the higher stamp duty charge and should be able claim first-time buyer stamp duty relief, too. And, as you aren’t a legal owner of the property, you won’t have to worry about CGT either.
However, it does still mean that you will have to pay the mortgage if your child or grandchild can’t afford repayments themselves, and your own credit rating could then be damaged.
So again, it’s not a decision to take lightly - lenders will require you to get independent legal advice before they’ll accept the application, so you can explore what this option will mean fully.
Alternatively, you could buy a property in your name, and rent it out to your child or grandchild, at a reasonable rate.
This will ensure your family have a landlord they can trust, while you generate extra income from a reliable tenant. Better still, most of the money stays in the family.
It’s worth noting that renting to family members – especially if you’ve never been a landlord before – can be a tricky and time-consuming process, so (as ever) it’s worth getting expert advice before proceeding.
There’s nothing to stop you renting a property to family members, although some mortgage lenders could see this as higher risk than a standard buy-to-let, as the owner is likely to be more lenient about late rent, for instance.
Since it will likely be your second property, the purchase price will be subject to the 3% stamp duty land tax surcharge .
You will need also to pay income tax on any income you receive, as if you were renting to any other tenant, adds Helen Thornley. “You need to declare the rent to HMRC, less any deductible expenses like insurance or repairs.”
You’ll need to complete a self-assessment if you start receiving this extra money, and remember to keep a record of income and expenses for at least five years after the tax year in which you file, as HMRC could ask to see these later on.
Thornley warns anyone thinking of renting to family should resist the temptation to keep the tax body out of the loop.
“HMRC can go back a number of years to recover unpaid tax - potentially up to 20 - if the income was deliberately concealed, with penalties and charges on top. The inquiry can be drawn out and stressful.”
The property must also comply with standard health and safety regulations, which have become more stringent lately (such as more rigorously addressing damp and mould), so you’ll need a fund in reserve to deal with issues as they arise.
If this house is an investment, and you plan to eventually sell it on for a profit, you’ll need to keep an eye on CGT. Since the property is not your primary home, you could be liable for tax on the difference between the purchase and sale price.
Another concern is that if your family member and their partner were to split up, the partner could obtain rights to remain in the property, particularly if they had custody of any children.
There’s no doubt that it’s only getting harder for younger generations to get onto the property ladder, and many families would be overjoyed if they can help out in some way.
However, while you do have some useful options for helping out, it’s worth doing some forward planning – will you be able to cope without that money for a long amount of time?
Will you be able to step in if the family member gets into financial difficulties? If something happens and you’re no longer able to help, do you have a backup plan?
If you’re thinking of assisting with a mortgage, first speak to a recognised professional – and if you’re planning on becoming a landlord, ensure you've spoken to a financial advisor, and perhaps a trusted letting agent, to understand the responsibilities involved.
It’s imperative that you seek solid, trusted advice for your situation, whichever path you plump for – you’ll need your own financial future to be as stable as it can before being able to help others.
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