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What are the benefits of an early inheritance for first time buyers?

What are the benefits of an early inheritance for first time buyers?

By
Anya Gair
Last Updated 25 August 2023

Find out all you need to know about gifting inheritance early and how it could help your loved ones get on the ladder sooner.

In this guide

With house prices climbing, more families are bringing forward plans to pass down their wealth to younger generations so they can get on the ladder. Gifting loved ones an early inheritance has its benefits, such as reducing your inheritance tax liability as well as being emotionally rewarding if it helps a love one reach a major life milestone, like getting married or buying their first home. But without carefully planning and an understanding of inheritance tax rules, your generous gift could come with a sting in the tail.

What is inheritance tax?

Inheritance tax is the tax payable on your estate when you die. Your estate is the total value of everything you own when you pass away, including the value of your home, minus the value of your debts. 

If your estate is worth less than £325,000, known as the Inheritance Tax Threshold, or the nil-rate band, your loved ones usually have no tax to pay. Any portion of your estate that is valued above the Inheritance Tax Threshold will be taxed at 40%.

Paying inheritance tax used to be a burden borne only by the wealthy. However, since the £325,000 threshold was fixed 17 years ago, house price inflation has meant families who never thought they’d be snared by the tax man could end up paying a hefty sum from their estate.

With careful planning, however, you can lower or eliminate your inheritance tax bill by making financial gifts to family or friends during your lifetime to reduce the value of your estate. 

Do you pay inheritance tax if you leave everything to your spouse?

You can leave any of your assets, inheritance tax-free, to your spouse or partner when you die. Any of your unused allowance can also be passed on to them.

If you want to pass on your assets to other family members, there are a few ways you could do this...

How to give inheritance:

1. Pass on property to your nearest and dearest

There’s no inheritance tax to pay if you pass on your home to your husband, wife or civil partner when you die. If you pass on your home to a direct descendant your tax-free allowance increases from £325,000 to £500,000 following the introduction of an additional £175,000 allowance called the main residence ni-rate band in April 2017. However, only children and grandchildren count as direct descendants. Step, foster and adopted children and grandchildren are included in this, but nieces, nephews and siblings are not. 

You can also pass on this property allowance to your spouse or partner if it is unused. That means as an individual you could pass on an unused inheritance tax allowance of £500,000. As a couple you could pass on up to £1 million tax-free.

If you want to pass on your home while you are still alive, you must survive the gift by seven years. If you die within seven years of gifting your home it will counted as part of your estate. 

You might like: How to choose a financial advisor or planner

2. Gift wealth to your loved ones

Another way you can pass on wealth to the next generation is to gift money to your children. Almost 4 in 10 adults said they wanted to pass on a living inheritance rather than wait until they had died. By giving your loved ones money before you die, you'll have the satisfaction of seeing them benefit from your hard earning savings. They can use it to invest in a business, the stock market or a house during their early adult lives. In doing so, your loved ones could turn even a small inheritance into more - for example, becoming a homeowner could make you £352,500 better off in comparison to the average private renter over the next 30 years—even if house prices don’t rise. It's no surprise that the Bank of Mum and Dad is one of the UK's biggest mortgage lenders! By gifting your children money to help with a house deposit, not only could you help them buy a home sooner but set them up to be financially better off in the long run.

3. Unlock equity from your home to gift

If your wealth has increased due to house price inflation you may not have spare cash to give away. Instead, you can unlock the equity from your home using a Retirement Interest Only mortgage or an equity release mortgage - both mortgages are designed for older borrowers. By taking out a mortgage on your home to pass on a living inheritance, you are reducing the value of your estate when you die. That’s because the value of your debt when you die, including a mortgage, is deducted from the value of your assets to work out your Inheritance tax bill. 

Learn more: Equity release vs RIO: Which is right for you?

You might like: Is equity release a good idea?

Speak to the experts in family mortgages

If you're interested in finding out more about how you could help a loved one buy a home through passing on inheritance early, get in touch with Tembo. We are an award-winning mortgage broker that specialises in family support mortgages and alternative ways to get on the ladder.

Get in touch

When to give inheritance?

Traditionally, inheritance would always be given after death. However, if you've paid off your mortgage and debts, it may be worth starting to give money to your loved ones as early inheritance before death. This will have two advantages; it will allow you to see your family and friends enjoying the gifts you want to pass to them, and it will also help reduce the amount that is liable for Inheritance Tax later on.

Read more: How to reduce inheritance tax liability

What are the benefits of an early inheritance?

1. Reduce your inheritance tax liability

By gifting wealth to your loved ones before your death, you can reduce the amount of inheritance tax they will pay on your death which could save them thousands. This is because by gifting wealth, you will reduce the value of your estate, therefore reducing the amount that may be above the Inheritance Tax Threshold.

2. Help your loved ones buy a home

One of the biggest hurdles for young people today is getting on the property ladder. Often, the main barrier to homeownership is saving a big enough deposit - on average, first time buyers need a deposit of £61,000.

As people are living for longer, today those aged 20 to 35 won’t receive an inheritance until they are aged 61, by which time most of their big life events are behind them. 

By passing on wealth to your loved ones before you die, you can help them get on the ladder sooner by helping to boost their house deposit. If you have cash savings, this could be as a traditional gift. If your wealth is tied up in your property, you could release money from your home using a Deposit Boost. The proceeds will then be gifted to your loved one to be used as part of or as their whole house deposit.

3. Reduce the amount of interest they'll pay

One of the benefits of a boosted house deposit is getting access to lower mortgage interest rates. By gifting wealth or unlocking money from your property with a Deposit Boost to loved ones, you can help them put down a larger house deposit and get access to more affordable rates.

In fact, on average our customers that used a Deposit Boost saved £17,000 over the first five years of their mortgage.

4. Help your loved ones be financially better off

As mentioned above, getting on the ladder not only means your loved ones will have a place of their own but be financially better off over the long run.. Becoming a homeowner could make you £352,500 better off in comparison to the average private renter over the next 30 years, even if house prices don’t rise.

What are the risks with passing on inheritance early?

Before gifting an early inheritance, you need to consider how the loss of wealth will impact your own retirement plans.

If you have saved hard all your life, it’s only fair that you should enjoy a comfortable retirement. If you give too much of your nest egg away to your family, your retirement lifestyle could be compromised. Worse still, if you live longer than expected or suffer an illness you may lack the means to pay for care or support yourself later in life.

A financial adviser could help you assess your retirement savings, investments and property wealth to work out how much you can afford to give away. Read our guide on How to choose a financial advisor for tips on choosing the right one for you.

You need to stick to the rules

Gifting an early inheritance can reduce the tax liability on your estate, but only if you stick to the rules. The rules around inheritance tax exemptions and allowances can be complicated, so getting professional advice can help you avoid making costly mistakes.

Everyone gets an annual gift allowance of £3,000 while they’re alive which is exempt from inheritance tax. You can make gifts to anyone you like as long as the total amount does not exceed your allowance. On top of that, if you are giving money as a wedding gift you can give away up to £1,000 per person. This goes up to £2,500 for a grandchild and £5,000 for a child.

You can also give away unlimited gifts of up to £250 per person provided you haven’t used up another allowance on them. 

If you want to give away a larger amount of money, a different rule applies. You may have heard of the seven-year rule. If you live for more than seven years after making the gift, of any amount, it will be free from inheritance tax. If you don’t, inheritance tax may be owed.

The younger you are when you make a gift using this rule, the more likely you are to survive for seven years. But remember not to deplete your retirement pot by being too generous too soon. 

See how a Deposit Boost could help your loved ones buy

Speak to a Tembo mortgage adviser to find out how you could release equity with a Deposit Boost to help family members get a place of their own, or to discuss your later life lending needs.

Get in touch

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