Sometimes the bank of mum and dad isn’t open or isn’t able to lend enough to help young people buy a home. Sometimes grandparents just have more resources to help. Those resources might not be financial. The right advice and guidance can also be valuable. Here are some tips to help.
Keep your own finances in good order
Modern retirement can last decades and you need to keep this in mind when making financial decisions. No matter how much you want to help your grandchildren financially, you should only provide them with money if you’re sure you can afford it. This goes for both loans and gifts.
What’s more, keeping your own finances in good order sets a good example to your grandchildren. If they’re just starting out in adult life, they will need to build their credit records. A large part of this is demonstrating financial responsibility.
Consider giving them their inheritance early
If you are looking to minimise your estate’s liability for inheritance tax, you might want to consider disposing of assets now. You could either monetise them and pass on the cash or pass on the asset itself.
Remember, however, to take Capital Gains Tax into consideration. This can be charged even if you pass on the item as a gift. Essentially, HMRC can look at what the person could have been expected to have paid you had they bought the item and calculate CGT on that basis.
You may therefore want to take financial advice and look for a strategy that will minimise both your CGT liability and your eventual IHT liability. For example, you might wish to dispose of assets relatively slowly and give your grandchildren their inheritance a little at a time. They could potentially put the money into a Lifetime ISA to benefit from a government bonus.
Consider gifting them cash savings
While emphasising the fact that you should only help them buy a home if you’re sure you can afford it, this can be a very useful way to help your grandchildren onto the property ladder. One point to remember, however, is that some lenders do have rules around “gifted deposits”. You and your grandchildren would therefore need to read up on these to make sure the gift didn’t backfire.
Consider giving them a loan
Loans to family members can be tricky to navigate. At the end of the day, you have to ask yourself what you can/will do if they can’t/won’t pay. If the realistic answer is nothing, then it might be better either to give them a gift or not to give them anything. If you are going to give them a loan then it’s strongly recommended to put everything in writing.
Consider being a guarantor on their mortgage
This is potentially a huge commitment and hence should be taken very seriously. It could, however, be a useful option in some cases. Possibly the single biggest key to success in making these arrangements work is to have an exit strategy laid out in advance.
For example, you might agree to guarantee their mortgage for five years. After this, your grandchild would need to remortgage in their own name or sell their home. You might want to consider negotiating an extension for this in particular circumstances but this should ideally be by mutual agreement. For example, if your grandchild was planning on moving soon, you might stay on the mortgage until they sell the property in their own time.
One important factor to consider is the possibility that your grandchild will want to have a partner move in with them. Under certain circumstances, your grandchild’s partner could develop a claim on their property. It would therefore be advisable to have some pre-agreed rules in place for this situation.
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The FCA does not regulate some forms of Tax planning and we act as introducers for it.