How can we help the ‘Boomerang Generation’ become financially independent, step out on their own and possibly gain some attractive inheritance tax (IHT) breaks along the way? By supporting your children in smart, tax-efficient ways, you could help them step out on their own with confidence and build a strong financial future.
1. Help your children get a foot on the property ladder
According to the Government, 3.6 million young adults aged between 20 and 34 still lived at home with their parents in 2023. That’s 28% of that entire age group! Although no more up-to-date data is available this has undoubtedly increased.
With fewer young people from this generation applying to university and those who are, struggling to get a foot on the property ladder as the average property price in the UK is £291,000 after a 4.3% price increase in the year to December 2024, it’s no surprise that many of us are housing our adult children for longer than we had anticipated.
Don’t get me wrong I love having my children around, despite their ability to stockpile laundry until 10 minutes before they ‘need’ it and eat more than I imagine the average rugby team does. But when does it end?
Several lenders now offer mortgages where parents can join forces with their children to secure a more affordable mortgage. With competitive rates and options such as using the parental home as security or placing a lump sum in a lender-held account for the first few years, these arrangements can significantly accelerate the timeline for children to move out and gain financial independence.
2. Gift money to your children
If using your property as security doesn’t sit comfortably with you, you could use your £3,000 annual IHT gift exemption allowance and make small regular payments to your children’s savings account.
You can gift larger sums of money, but you need to survive for 7 years after giving the gift for it to be inheritance tax-free. With the possible change to the treatment of pensions in terms of IHT after April 2027 there could be an argument for gifting larger sums sooner rather than later. See our recent article for details.
3. Charge them rent
If your working children claim to be saving but seem to be making little progress, you can encourage better financial habits by charging them rent. You deposit the money into a savings account and return it to them later – giving them a helpful boost when they’re ready to move out.
Sometimes, in the words of Nick Lowe, “You’ve gotta be cruel to be kind in the right measure!”. As long as you don’t receive more than £625 p.m. there’s no tax implication for you! This is enforced savings – you could even suggest they open an ISA if over 18 and the ‘rent’ is paid into the ISA, adding tax efficiency to the mix.
4. Set them up with a Lifetime ISA
A better alternative could be a Lifetime ISA (LISA), which offers a 25% government bonus when used for a first home purchase or as a pension investment. Since LISAs can hold equity-based funds, they may offer stronger long-term growth potential. Additionally, they allow for larger annual contributions of up to £4,000, making them a valuable savings tool.
Always remember the value of equity investments can go down as well as up, so they could get back less than invested.
5. Monthly contributions
If you’re used to regularly paying school fees or other child-related expenses from your normal income, you could consider helping them with a monthly contribution.
You do need to be a little careful of the tax rules, especially if the child is under the age of 18 (Help to Buy ISA is available from age 16), as there are tight rules regarding interest a child can receive on money gifted by a parent – which by the way doesn’t apply to gifts from grandparents…now there’s another thought!
However, if your children are 18 or older, gifting in this way is generally fine. If there has been a pattern of regular payments – such as school fees, continuing with small, regular, and affordable gifts from your income should qualify for an inheritance tax (IHT) exemption. For more details on this see our recent article here.
6. Secure your children’s longer-term wealth with a pension
If they go to university, by the time they leave, they will be in debt and with the new longer repayment term of 40 years they will have the repayments potentially for most of their working life. The housing market will also zap a high percentage of their income, leaving less for them to direct towards saving for later life, let alone retirement.
By kick-starting a pension for them, your ‘gifted’ money will not only grow over a long period of time but will also benefit from the appropriate tax relief added to it each year by the government. Better still, your children can’t access it until they’re 55. This age is rising to 57 soon, so you don’t need to worry about it being frittered away before then!
Building a secure financial future
These ideas can help set them up for a secure financial future and finally take that step toward independence. Whilst we love having our children around, sometimes it’s nice to have the time and space away from them – just so we can miss them, naturally! A little help to get them on their way is always welcome on both sides.
Why not book a chat with your financial adviser to discuss or even suggest your child starts working with an independent financial adviser?
The concepts and suggestions in this article must not be viewed as advice. As always we recommend you approach a Financial Adviser who will take your circumstances into full consideration before providing advice.
What financial ‘incentive’ have you put in place to give your children that gentle nudge out the door when the time comes? Let us know below.