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How you can use your home to save money for your grandchildren
Grandparents saving money for their grandchildren can utilise funds tied up in their existing home to give them a helping hand
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Typically, the Bank of Mum and Dad has been the initial port of call when the time comes for children to make those first big investments, such as getting on the property ladder. However, young people are also increasingly turning to the Bank of Gran and Grandad for financial help.
Saving for grandchildren doesn’t have to begin when they are young – often a strategically timed cash gift from grandparents when the time is right can help your loved ones get the best start in life. By advancing an inheritance in this way, you can also provide guidance on how it is spent, and see it benefit your grandchildren in your lifetime.
For many grandparents investing for grandchildren, however, getting this cash may not be straightforward. In such cases, grandparents can utilise their home to invest for the children’s future.
How can grandparents provide help to first-time buyers?
One of the most important purchases a grandparent can help their grandchild with is getting on the property ladder. With the increase in property prices over time, the amount needed as a deposit has climbed higher and higher. Most lenders require a buyer to put down at least 5% of the property value as a deposit– and many demand even more than that – so it can take a long time to save up enough.
With the various restrictions and lockdowns imposed during the Covid-19 pandemic, the property market experienced a mini-boom that increased house prices. With this increase, the average deposit for a first-time buyer also increased, to an average of £57,000; a significant sum.
Grandparents can help the first-time buyer in their lives by contributing towards the deposit. However, not everyone has that sum of money at their disposal. For many homeowners over 55, the greatest part of their net worth is tied up in the bricks and mortar of their home.
How to free the wealth in your home for your family
If you are a grandparent whose wealth is largely tied up in property, you still have the option to save money for your grandchildren by releasing equity from your home.
Equity release is the process by which a homeowner aged 55 or over can unlock wealth from their home, without the upheaval of moving to a smaller property. The most popular type of equity release, a lifetime mortgage, involves borrowing a tax-free sum against the home, without needing to make monthly payments. Instead, the amount borrowed plus interest is repaid after the borrower passes away or enters long-term care, usually through the sale of the home.
In order to help over-55 homeowners consider how equity release could help them, Telegraph Media Group has partnered with the market-leading broker Responsible Equity Release. They can offer you a no-obligation appointment with a fully qualified equity release adviser, who will explain what equity release is and how it works.
Last year, 11% of people that Responsible Equity Release helped to release equity did so with an early inheritance in mind.* With their tax-free cash lump sum, it would have been possible to help any first-time buyers in their family.
How much money can grandparents gift to children?
If you are considering giving your grandchildren a gift, there are some Government rules to consider. These allow for gifts of up to £3,000 each tax year, which are exempt from being considered part of the value of your estate.
Anything over this amount could still be considered part of your estate and therefore liable for any inheritance tax. However, provided that you live for seven years after giving the gift, the inheritance tax that you may have to pay on it will taper downwards to 0%.
In addition to this £3,000, you are also allowed to gift:
- Wedding gifts of up to £1,000 per person (or £2,500 for a grandchild and £5,000 for a child).
- Normal gifts, such as those for Christmas or birthdays.
- Money towards living expenses, for example to help with a child aged under 18.
It is possible to use these exemptions on the same person, so if you wanted to, you could give your grandchildren gifts for their birthday, Christmas, and their wedding within the same tax year. You should also consider the effect that gifting could have on any entitlement to means-tested benefits that you have.
The Telegraph Media Group is not a regulated inheritance tax adviser, so, when considering using equity release to gift an inheritance, we would recommend seeking further advice on whether inheritance tax may apply.
What is inheritance tax?
Inheritance tax is charged to the estate after a homeowner passes away, usually at a rate of 40% on any value over £325,000. There is no inheritance tax to pay if everything is left to their spouse. In this case the spouse will also receive the deceased’s unused allowance. This means that anything they leave to their children will not incur an inheritance tax unless the estate is valued over £650,000.
Equity release and inheritance tax
When releasing equity from the home, the value of your estate and your entitlement to means-tested benefits could be affected. Should you choose not to make any monthly payments, the interest will build up over time on a compounding basis.
When it comes to repaying the full amount plus interest after the last homeowner passes away, the cost of repayment is calculated before any inheritance tax liability is charged. In this way, it is possible that releasing equity could form part of your wider wealth management with regard to estate planning. Be aware that the FCA do not regulate inheritance tax planning.
Responsible Equity Release will only offer you advice on releasing equity with a lifetime mortgage. If you are interested in it for purposes of inheritance tax planning, then consider discussing it with an estate planner first.
To begin your journey and learn more about how you can use your home to save for your grandchildren, use the calculator on this page today. You will receive a free guide to equity release and see an estimate of the amount of tax-free cash that you could release.
- See how much cash you could release by using the free equity release calculator today.
Read more:
- Do you pay tax on equity release?
- How to calculate buying out your spouse's share of the house?
- How to pay off a mortgage using equity release?
*Responsible Equity Release Data, 2020
By taking money out of your property now, a lifetime mortgage may reduce the value of your estate. A lifetime mortgage may also affect your entitlement to means-tested benefits. An adviser can discuss both these considerations with you before you decide to proceed.
Equity release is only available to homeowners that own a property within the United Kingdom.
The above article was created for Telegraph Financial Solutions, a member of Telegraph Media Group. For more information on Telegraph Financial Solutions click here.
The Telegraph Media Group Equity Release Service is provided by Responsible Equity Release, a trading style of Responsible Life Limited. Responsible Life Limited is authorised and regulated by the Financial Conduct Authority and is entered on the Financial Services Register (https://register.fca.org.uk/) under reference 610205. Only if you choose to proceed and your case completes will Responsible Life Limited charge an advice fee, currently not exceeding £1,690.
Information correct at date of publication.