Helping Your Children Buy A Home
Helping a child onto the housing ladder is one of the most common large financial decisions people make, and it is almost always treated purely as a question of whether the money can be spared.
There are two consequences that tend to be missed. One is that the gift can stay connected to your estate for several years rather than disappearing on the day it leaves your account. The other is that if you went further and acted as a guarantor, you have taken on an obligation of your own.
Neither is a reason not to help. They are reasons to know what you have taken on.
The short answer
A gifted deposit does not always leave your estate immediately for inheritance tax purposes, because gifts can remain relevant for seven years and only fall fully outside after that. If you die within that period the gift can still count towards the estate, which can create a bill the family did not expect, and cover arranged for that window is one way of dealing with it.
What this changes
- A substantial sum has left your savings, which reduces what is available for your own needs
- For inheritance tax, gifts can remain relevant for seven years rather than leaving immediately
- If you die within that period the gift can still count towards your estate
- Acting as guarantor makes you responsible for somebody else's mortgage payments
- Your own protection may now be sized against a position that has changed
- Where several children are involved, fairness between them becomes part of the planning
The bit people miss
The seven year point is the one almost nobody is told about. People assume that once the money has been handed over it is gone and nothing further follows. For inheritance tax, gifts can be brought back into account if you die within seven years of making them, with the effect reducing the longer you survive. So a generous gift made at seventy can leave an unexpected bill for the rest of the family if things happen sooner than anybody planned. The rules and the reliefs are detailed and they change, which is why this is a question for an accountant rather than something to work out from a website.
If You Went Guarantor, That Is A Different Commitment
Gifting money and guaranteeing a mortgage feel like versions of the same generosity. Financially they are not remotely the same.
A gift is finished, subject to the tax position. A guarantee is an ongoing obligation: if your child cannot make the payments, the lender can look to you, and that can continue for the life of the mortgage. The exact terms depend entirely on the agreement you signed, and it is worth reading what you actually committed to rather than relying on how it was described at the time.
The protection question that follows is uncomfortable but straightforward. If you died or became too ill to earn, could your child still meet those payments on their own? If not, the guarantee is a risk sitting on your family as well as on theirs, and cover is one way to deal with it.
Look After Your Own Position First
This is the part we would rather say plainly than leave implied.
People give away money they may later need, because the request is immediate and their own future needs are abstract. A deposit handed over at sixty-five is money that is no longer available for care costs, for a roof, or for a period when you cannot work. Once it is in somebody else's house, getting it back is not a realistic option.
So the sensible order is to work out what you need to keep, then decide what can be given. And if reducing your own buffer has left you more exposed to illness or to death than you were before, that is worth covering rather than ignoring. Helping your children is a good thing to do. Doing it in a way that leaves you dependent on them later is not the outcome anybody was after.
What usually fits, and why
A policy arranged to cover the gift during the period it remains relevant is a recognised way of handling this. The sum needed falls as the years pass, which is a shape life cover can be arranged around.
Important if the cover is there for a tax reason, because a payout that is added to your estate can increase the bill it was meant to pay.
Relevant if you are still working and have just reduced your savings buffer considerably. The money that would have absorbed a period of illness is now in a house.
Common questions
Is a gifted deposit free of inheritance tax?+
Not necessarily straight away. Gifts can remain relevant for seven years, and if you die within that period the gift can still be counted towards your estate, with the effect reducing the longer you survive. The detailed rules and reliefs change, so this is a question for an accountant rather than a general answer.
What is the seven year rule?+
In broad terms, a gift can be brought back into account for inheritance tax if you die within seven years of making it, and the amount counted reduces as more of that period passes. The specifics depend on the size of the gift, the reliefs available and the rules at the time, which is why it needs proper advice.
Can insurance deal with that risk?+
Yes, and it is a recognised use of life cover. A policy can be arranged to provide the amount that might be owed during the period the gift remains relevant, reducing as the risk reduces. It is normally written in trust so the payout is not added to the estate and taxed alongside.
I am acting as guarantor. Does that need covering?+
It is worth looking at, because a guarantee is an ongoing obligation rather than a one-off. The question is whether your child could meet the payments alone if you died or could not work. If not, the risk sits on your family too, and cover is one way to handle it.
Should I gift the money or lend it?+
That is a legal and tax question rather than an insurance one, and the answer affects both the inheritance tax position and what happens if your child separates from a partner. Worth taking advice before the money moves, because it is much harder to restructure afterwards.
Cover that often goes with this
The gaps we most often find sitting next to this one.