The fact that, from now, first time buyers will only pay stamp duty if they buy a property over £300,000 will be welcome news to those who have scrimped and saved just enough to get together a deposit, then persuaded a mortgage lender that they are a credible borrower and even then have often been prevented from making the purchase at the final hurdle because of the additional thousands of pounds needed to cover stamp duty.
The change means that 95% of first-time buyers will benefit – saving as much as £5,000. And some 80% of first-time buyers will pay no stamp duty at all.
Say ‘hello’ to the Bank of Mum & DadMany parents want to step in and help their child make a start on the path to property ownership.
A report by Legal & General shows just how important the Bank of Mum and Dad is to the liquidity of the first-time buyer market. Last year, parents lent over £5 billion and helped to finance 25% of all UK mortgage transactions, making the Bank of Mum & Dad the equivalent of a top 10 mortgage lender in the UK.
While the average financial contribution is a not an insubstantial £17,500 or 7% of the average purchase price, 57% of Bank of Mum and Dad contributions are gifts. A further 18% are loans with no interest. Only 5% are loans with interest.
Make sure you play by the rulesIf you do decide, as so many parents do, to step in and help, then just make sure you don’t inadvertently land your child with a stamp duty bill.
This stamp duty exemption is only available to first time buyers, so joining your child on the mortgage application as an existing homeowner will leave you, and them, liable to stamp duty at the non-first time buyer rate.
You can help in other ways, such as helping your child out financially rather than as a joint mortgage applicant – but make sure you don’t fall foul of the inheritance tax (IHT) rules in the process.
If you want to lend a financial hand to your son or daughter, then you might want to consider gifting them a regular amount each month, rather than a lump sum. Known as a ‘gift out of normal expenditure’, you can give away an unlimited amount of ‘surplus’ income, inheritance tax-free, as long as the gifts are regular and don’t impact on your normal standard of living e.g. you wouldn’t have to sell your home to fund the payments.
The seven year ruleThe seven year rule enables you to give any amount of money to your children, or anyone else, free from inheritance tax, as long as you give it to them at least seven years before you die. Be careful though, because the rules around gifting substantial sums during your lifetime get complicated and it’s a good idea to take legal and financial advice to ensure you do this in the most tax-efficient way, and don’t end up saddling your child with a tax bill when you die.
Gifts to your childrenAs a parent you can gift up to £3,000 in each tax year to your children (or anyone else you choose) without inheritance tax implications.
It’s important to bear in mind though that this £3,000 limit is the total that is exempt, so you would need to split the £3,000 between your children, rather than giving them £3,000 each if you want the money to remain free from inheritance tax. However, if you haven’t used last year’s allowance you can gift £6,000 this year.
The exemption is not given automatically, and needs to be claimed after death. So keeping records of your income, expenditure and evidence that you intended the gifts to be regular will make it easier for your family to make a claim.
Encourage them to play their partHaving a goal in mind is a great way to incentivise saving. And what better incentive than saving for their first property? Encourage your child to start saving into an ISA as early as possible. The longer they have to save, the longer their money has to grow.
Opting to invest a regular monthly sum makes saving achievable for even the most cash-strapped of youngsters. They can save as little as £50 a month into a stocks and shares ISA and choose where the money is invested, while still being able to add lump sums, where possible, up to a maximum total of £20,000 in the current tax year.
Our Select 50 range of funds covers all areas of investing from UK and international equities and bonds to gold and property, enabling them to take an active interest in where and how their money is invested.
Register for a 10% Personal Investing discount with Fidelity
The value of investments and the income from them can go down as well as up and investors may not get back the amount invested. Eligibility to invest into an ISA and the value of tax savings depends on personal circumstances and all tax rules may change. The Select 50 is not a recommendation to buy or sell a fund. This information does not constitute investment advice and should not be used as the basis for any investment decision nor should it be treated as a recommendation for any investment. Fidelity Personal Investing does not give personal recommendations. If you are unsure about the suitability of an investment, you should speak to an authorised financial adviser.