Financial planning

First step on the property ladder

Colin Dyer

Remember those traditional images of someone carrying their partner over the threshold of a new home? Buying a home used to be a rite of passage – and a purchase that would ‘set you up for life’.

But times have changed, and the cost of property has been rising at a much faster rate than incomes.  And this is affecting the lives of a whole generation of younger people who, just as their parents and grandparents did before them, would love to own their own homes, or at least get a foot on to the property ladder.

The press is full of stories of “children” – many of whom are well into their 30s or 40s, let alone their 20s – returning to live in the parental home,  with very little prospect of being able to set up home themselves, or start their own generations.

The reason is simple – they cannot raise a significant enough deposit, let alone commit to mortgage payments on expensive houses – and meanwhile, the cost of renting continues to rise.

Generation rent

The statistics back this up.  The average age of a first-time buyer is now 30; back in the era of that buyer’s grandparents, the early 1960s, the average age was only 23.  Meanwhile, recent research by the Local Government Association found that 46% of all 25-year-olds owned their home 20 years ago, compared to only 20% now.

In London, the situation is even tougher; the typical first-time buyer has an income of £65,000 and a deposit of £85,000.  That translates to almost two years’ salary after tax, and is a lot more than previous generations have ever had to pay – the average UK-wide deposit in 1990 was only £6,600.

Of course, this doesn’t just affect those family members who can’t afford to buy a home.  We can’t automatically assume that the parents are entirely thrilled to have the spare room occupied on a permanent basis – especially if they are also supporting older family members, or baby-sitting other siblings’ grandchildren too.

A leg-up

How has this situation come about, and why are things so different and difficult for today’s younger generation?

Well, those of us who are currently in or approaching retirement didn’t ‘have it lucky’ as such, but grew up in an economic climate which made buying a property, saving for a pension and investing for the future seem relatively routine, compared to today.

It helps to try and imagine what we would do ourselves if we were leaving university and trying to settle down now: reminding ourselves that it’s better to save up for the things we want or put up with hand-me-downs, rather than buy everything new might be a good start – but looking to the family for support could well have been on our list too.

Maybe you’re in this position and you have aspiring home-owners in your family.  If so, then alongside passing down an understanding of the value of thrift and saving, reviewing your own financial plans to help the next or next-but-one generation with the cost of buying a home could make a real difference to their future.

The bank of Mum and Dad

How can parents – and wider family – help? The most obvious and immediate option is to help out practically with the required funds.

If you want to explore this route, start with your financial planner, and ask them to chat you through all the financial options.  What those options are will vary, depending on your plans and your personal circumstances.

Leaving money to children or grandchildren in a will is one approach, but by making gifts during your lifetime, you can enjoy seeing the benefit the money has on your family and the part you play in their future. You also get to offer advice and experience alongside practical help.

And since the recent changes in pension rules, it’s possible to take as much or as little as you want from your pension from age 55. This means savings that were once locked away can be used to help offspring get on to the property ladder.

Please put on your own oxygen mask first…

If you’ve ever been on an aeroplane you’ll know what I’m getting at here.

If you’re thinking about giving the kids a financial helping hand, it’s important to bear your own financial circumstances and future in mind. If you run out of ‘oxygen’ (cash) you’re not going to be able to help anyone, so be very wary of gifting money earmarked for your own potential future living costs or care expenses.

Your financial planner can help you work out what you might need for yourself and then talk about the best way to help others.

Planning for passing it on

It’s also just as important to talk to your financial planner about Inheritance Tax (IHT) if you are considering handing over lump sums.

There are ways of easing the situation; for example, by making gifts of up to £3,000 a year (known as the annual exemption), the money will be exempt from IHT when you die. You can also use up your £3,000 exemption from the previous tax year – and couples can give away double these sums. But these amounts might not be enough for a deposit on a property, which is why it’s important to seek advice about IHT.

On top of this exemption, you can make small gifts up to the value of £250, to as many people as you like, in any tax year. But you can’t give someone another £250 if you have given them a gift under the £3,000 exemption.

There are a few other such complexities involved, but your financial planner will work it all out for you and make sure you arrive at the most tax-efficient solution.

Finding the right combination

Concerns about giving grandchildren large sums of money when they are young may rule out absolute gifts. There are ways to help younger family members to save for their first home – without handing over too much money to someone you feel may be too young to manage it.

You could set up a trust that they can access once they reach 18: any gifts into the trust over £3,000 will be subject to the seven-year IHT rule, but any growth is exempt. Your financial planner can also discuss suitable investments for your trust.

Playing a part in their future

There’s little doubt that it’s proving to be one of the hardest times in recent memory to try and enter the housing market.

If you want to help your next generations in a practical way, your 1825 Financial Planner will help you work out the best ways to share your wealth with your family – whether now, or in the future.

And if you have any questions about anything covered in this blog, we will be happy to help. You can book a free initial consultation with one of our financial planners by using our online form.

Laws and tax rules may change in the future. The information here is based on our understanding in February 2017. Investments can go down as well as up meaning you may get back less than you put in. The information in this blog should not be regarded as financial advice.