Will I have to pay inheritance tax if I help my children or grandchildren buy their first home?

Six in 10 want to help their children or grandchildren climb the property ladder, but 47 per cent do

Six in 10 want to help their children or grandchildren climb the property ladder, but 47 per cent don't know how to tackle inheritance tax rules - Credit: Getty Images/iStockphoto

More first time buyers are relying on the Bank of Mum and Dad to help with their deposit, but nearly half of parents and grandparents don’t understand the new rules on inhertiance tax and gifting

47 per cent of parents and grandparents who wish to help their children and grandchildren when it comes to buying their first property are unsure about how to get around complicated tax and gifting laws.

The equity release provider Key Retirement warned that 38 per cent are unaware that they may be about to fall into a tax trap if they don’t know the rules.

Dean Mirfin, technical director at Key Retirement, said: “At a time when the financial squeeze on younger generations is getting worse it makes sense that grandparents and parents want to help their family now rather than waiting till their death.

“But there is real nervousness and confusion when it comes to the awareness around the rules of financial gifting. “

67 per cent of parents and grandparents were aware they could release wealth tied up in their property, with one in four doing so in the first quarter of this year.

Key Retirement revealed that equity release customers cash in tax-free property wealth to the tune of £73,610 on average, with 22 per cent using at least a proportion of the money to help their family.

The average price of a property in Camden as of April 2017 is £814,188, which would require a 10 per cent deposit of ove £81,000.

Alongside high deposits will come mortgage repayments, with some lenders recently launching 5 per cent rates on fixed mortgages to help first time buyers onto the ladder, but young people looking to buy still need a leg-up.

6 in ten (58 per cent) want to give their relatives a leg up on the property ladder, but three in four (73 per cent) admit to finding the rules complicated.

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New inheritance tax (IHT) rules introduced in May established higher IHT allowances on family homes after death of £425,000, half that of couples allowances.

The threshold will rise to £1 million for couples in the next four years, meaning that many properties will then be exempt from IHT.

For any other property that doesn’t fall into the family homes bracket, the allowance is £325,000 for singles and double that for couples. Therefore, gifts where wealth is predominantly in the home should be exempt for the majority.

Gifts of £3,000 can be given tax free over a number of years, so long as they are transferred at least seven years prior to death.

Gifts given between six and seven years before death rack up 8 per cent IHT if over the threshold, rising to 40 per cent for gifts given less than three years before death.

37 per cent of respondents said they would gift funds sooner to enable the transfer of wealth between the generations if tax incentives were offered.

Mr Mirfin added: “We would support tax breaks on gifts and early inheritance in those instances where the incentives can be used for major intergenerational gifts, which have a greater perceived societal benefit.

“From rising student loans to property prices younger generations need a helping hand more than ever. Early inheritance can have life changing consequences for some families and our study shows that equity release could be a major source for these gifts.”