The Covid-19 effect on the bank of mum and dad - and how to plan for it

One third of parents are now lending to children so that they can get on the housing ladder - but a worryingly high percentage are either refinancing or selling significant assets in order to do this. Planning early could not only ensure their future is safe - but yours is secure too.

According to estate agency Savills, the Bank of Mum and Dad contributed £5bn to the property market in 2019. Since the pandemic hit, the percentage of first-time buyers getting help from family to fund their deposit has jumped from 22% in March 2020 to 33% in March 2021.

As mortgage lenders insisted on stricter criteria and withdrew popular products that came with lower deposits, the average deposit for a first-time buyer jumped nearly £12,000 in the past year to £59,000. It is thought this was the reason behind prospective first time buyers turning to their family and friends for assistance.

Research from Aldemore Bank said 93% of prospective first time buyers received funding assistance from parents in the past 12 months - up from 62% in March 2020. However, it seems 38% of parents are remortgaging their property to help fund their child's move - up dramatically from 7% pre-Covid-19.

Also, 38% have sold "significant assets", such as a car or holiday home, or have released equity in their homes to drum up funds, a huge increase from March 2020 where just 9% of parents went to these lengths. Other popular support for first-time buyers include downsizing (18%), selling a second/buy-to-let property (18%), taking money from pensions (17%) or stocks/shares (16%) (source: as before).

As property prices continue to rise, and the bank of mum and dad becomes all the more important, it's never too early to start planning for their future. Current Inheritance Tax (IHT) rules in the UK allow any individual to make a cash gift out of their normal income, which will become free from IHT - these are also known as "exempted gifts".

Exempt gifts also include:

  • wedding or civil ceremony gifts of up to £1,000 per person (£2,500 for a grandchild or great-grandchild, £5,000 for a child)
  • Small gifts for, say, Christmas or birthday presents not exceeding £250 per year to each person
  • payments to help with another person’s living costs, such as an elderly relative or a child under 1

You can also give away up to £3,000 worth of gifts every tax year without them being added to your estate. However, if you give more significant gifts, you would need to survive seven years to avoid any IHT implications.

Therefore, even if your son or daughter is not ready to move out right now, but may be in a few years' time, it might be worth considering gifting them up to £3,000 for them to put away towards a deposit if you are in a position to do so.

If you would like some further information about IHT or estate planning, or you'd like to change or update your will, contact the private client team at Downs Solicitors to see how we can help.


Mehboob Dharamsi

Mehboob Dharamsi

Partner

Tel: +44 (0) 1932 588579

Office: Cobham

Email: m.dharamsi@downslaw.co.uk