Bank of Mum and Dad warned of tax shock

The Bank of Mum and Dad risks running up “accidental” inheritance tax (IHT) bills, according to research which found that almost half of parents and grandparents do not understand the tax rules on gifting.

Nearly two out of five people are not aware their estate might be liable for inheritance tax on gifts to family members, a poll found.

Key Retirement, an equity release provider, said its survey highlighted the “nervousness and confusion” over IHT rules, which resulted in many people failing the make the most of the reliefs to which they were entitled.

It said many people did not know they could give £3,000 a year, make gifts to couples getting married or make unlimited gifts out of their income free of inheritance tax.

Dean Mirfin, technical director at Key Retirement, said many gifts would needlessly fall into the IHT net because they took the form of a lump sum instead of being spread over several years. “When you look at the amounts of gifts, they are not that large and if the giving was managed properly they would be exempt.”

The confusion over the tax rules on lifetime giving was underlined by the uncertainty people felt about whether their estate was likely to be subject to IHT. The “family home allowance” that will gradually increase the IHT threshold for a couple passing on their family home to their children to £1m might end up removing many estates — and gifts — from the IHT net.

Nearly six out of 10 people want to be able to help children and grandchildren on to the property ladder, which meant paying out an average of more than £40,000 for a 20 per cent deposit, according to the poll. About 18 per cent of parents and grandparents said they wanted to help pay off debts and student loans, while 13 per cent wanted to fund a wedding for children or grandchildren.

The average deposit for a typical first-time buyer is £32,321 or 16 per cent of the purchase price, according to figures published by Halifax in March. There are wide regional variations: London buyers put down an average of £100,445, more than double the £47,472 needed on average in the south-east. Northern Ireland has the lowest average deposit at £16,695.

While mortgage lenders offer home loans requiring deposits as small as 5 per cent, many first-time buyers will meet a further barrier in the regulations on mortgage affordability. These require borrowers to demonstrate they can make their monthly repayments even if mortgage interest rates rise to 5 per cent or more.

The need to pass the test is not the only reason why parents and grandparents often gift higher amounts than necessary for a deposit: borrowers can access the best mortgage deals with deposits of 35-40 per cent, will face lower monthly repayments and reduce their risk of falling into negative equity.

Andrew Montlake, director at mortgage broker Coreco, said: “There does still seem to be quite a lot of cash around and we see a lot of parents or grandparents making higher deposit gifts just to help children get a cheaper rate and not to be so highly geared. In London we’re seeing gifts of £100,000.”

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The average UK house price rose to £220,000 in April, up by £12,000 since April 2016, according to the Office for National Statistics house price index, updated on Tuesday.