A baby born today would need more than £500,000 to buy their first home at 31 – the average age of first-time buyers, according to research by estate agent Lomond. This represents an increase on the current average house price of £237,655 paid by first-time buyers today.
Those buying in London would need £1 million, the report said. The figures are based on historical house price growth over the past 31 years and assume prices will experience the same level of growth over the next 31 years.
If these figures were true, a baby born today would need around £75,000 for a 15 per cent deposit – and would earn £95,000 a year to get a mortgage that is typically four and a half times his income.
Even allowing for inflation, this is a substantial jump from the current average full-time salary of £34,963 per year.
Of course, there is no guarantee that property prices will follow the same trend as in previous years. However, it is likely that in the future, first-time buyers will need a lot of money to access real estate. And like today, many find it difficult to achieve this without the help of family members.
One way to reduce the risk of having to pay inheritance tax later is to place savings in a trust for your child or grandchild.
Finding a large lump sum to help with the deposit for a first home is a big ask for most families. But starting to save early is a little more manageable. Spending £85 a month on a child or grandchild born today could net you £75,000 by the time they turn 31, assuming you get a 5% annual return and you reinvested the interest.
Laura Suter, personal finance director at AJ Bell, says: “In everyday parenting, it’s easy to put sorting out your child’s savings at the bottom of your list, but putting a little money aside each month can help them give a good idea. sum when they are older. So where should you save money?
Your first option is a simple children’s savings account. You can make a monthly deposit or add lump sums and when they turn 18 they will have control of the account. The best account on the market is Coventry Building Society which pays 5.25 per cent interest.
However, this option poses several problems. Firstly, if you are the child’s parent and the account earns more than £100 in interest per year, it will be considered your money for tax purposes.
It will form part of your personal savings allowance and if this exceeds £1,000 a year for basic rate taxpayers (£500 for higher rate earners) it will be taxed as part of your income.
The solution is to put the money into a Junior Isa. Here, all investment returns and savings interest are tax-free.
The best Junior Isa also comes from Coventry Building Society and pays 4.95 per cent.
Junior Isas must be managed by a parent or guardian until the child reaches 18 years of age. The money is then theirs and they can choose how they manage or spend it. The next problem is growth. If you’re saving for a baby or small child in the hopes that the money will help them buy their first home, you’re looking at a very long time.
The best account on the market is Coventry Building Society which pays 5.25% interest.
The gains will be higher if you invest the money rather than holding cash, due to the erosion of inflation.
“A buyout of stocks and shares Junior Isa is usually the way to go,” says Myron Jobson, senior personal finance analyst at Interactive Investor. “You have a better chance of producing returns above inflation than the interest you get on your liquid savings.
“Most Junior Isas will be inherently long-term as they will only be accessible when the child turns 18. So there is plenty of time to iron out the inevitable short-term shocks to the stock markets.” If you’re worried about your child getting their hands on money as a teenager, as they would with a Junior Isa, another option would be to save into an account in your name. This way you can choose when you give them the money.
“For those who don’t use the full adult Isa allowance of £20,000 per year, setting aside funds within this allowance could be a good way to save for your child,” says Jobson . If you choose to keep the savings in your name, be aware that this could cause inheritance tax issues in the future.
Any financial gift above the £3,000 annual allowance would still be considered part of your estate for inheritance tax purposes if you died within seven years of the gift.
Each has an allowance that allows them to pass on gifts of up to £325,000 without inheritance tax – or £650,000 for couples.
You also have an additional allowance of up to £175,000 per person, designed to allow you to pass on a family home worth up to £1 million tax-free. Anything above these allowances will likely be subject to an inheritance tax of 40 percent.
There are several ways to make a cash donation during your lifetime to reduce the bill.
One way to reduce the risk of having to pay inheritance tax later is to place savings in a trust for your child or grandchild.
You can then stipulate when they can access the money – 30 might be a good choice if you want them to use the money for their first home.
The money belongs to the child as soon as the trust is created, so the seven-year countdown could begin now rather than years later, giving you a greater chance of surviving long enough to eliminate any threat of rights inheritance on the amount in trust.
Additionally, you would have gifted the money while it was still a relatively small sum, before growth made it more likely to impact your estate for inheritance tax purposes.
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