Inheritance Tax Proposals Could Impact Bank Of Mum and Dad

Suggested changes to UK inheritance tax could have a potential impact on the property sector.

Earlier this month, an All-Party Parliamentary Group (APPG) encouraged the Government to consider making serious reforms to inheritance tax (IHT) in order to reduce the burden for the increasing number of middle-class families being dragged into the inheritance tax threshold.

The proposals suggest that the current 40% tax should be reduced to a flat rate of 10% with estates worth over £2 million paying a 20% rate.

The APPG also recommended that tax relief of gifts made in life under the ‘seven-year rule’ be scrapped, with all wealth transfers, made both on death and in life, taxed at a flat 10%.

Instead of the seven-year rule which allows gifts of £3,000 and writes off a larger amount if the donor lives longer than seven years, a £30,000 annual allowance was proposed by the group. Any amount over this figure would then be charged at 10%.

It also means that if parents wanted to gift their children an average deposit, they could face a significant tax bill for their good deed, if the new inheritance tax system is adopted.

The average house is now valued at £240,054 and rising, according to January’s Halifax Price Index. A 15% deposit contribution from the Bank of Mum and Dad would mean a gift of £36,008.

Under the proposed inheritance tax system, £6,008 would be liable to the 10%, leaving them lumbered with a bill worth over £600 for their kind gesture.

First time buyers (FTBs) are the life blood of the market and the Bank of Mum and Dad are now a major player in the UK’s lending market.

Yorkshire Building Society found that the 353,436 FTB buyers in 2019 eclipsed the pre-financial crash levels of 2007. Meanwhile, Halifax suggested that the market share of FTBs in 2019 rose from 39 per cent at the start of the decade to 51% last year.

On average, 40% of all first time buyers are offered an early inheritance to help fund their dreams of owning their own property, according to Habito.

However, the reliance on older relatives to fund property deposits can exceed this with 45% of property deposits in the South East and 60% in London dependent on a least some money from the Bank of Mum and Dad to fund a housing deposit.

Daniel Hegarty, Habito Chief Executive, said:

“While first-time buyers really drove the property market last year, it’s clear that most have to rely on help from their families who are going to incredible lengths to help get their adult children get on the ladder.”

Would the proposed tax changes create a negative impact on the property sector? Should generous relatives be taxed for lending their younger relatives the vast sums of money it now takes to fund a property deposit?

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