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A three-in-one solution to the rising cost of buying a home

Having three generations under one roof can solve a host of problems, says Chiara Cavaglieri

A parent's work is never done, but the bank of mum and dad is run off its feet helping first-time buyer (FTB) children with their deposits as well as trying to support elderly parents with ever-increasing care costs. Increasing numbers of British families feeling the pinch are taking drastic action, moving to live together under one roof. But is multi-generational living such a bad thing?

Official figures show that there has been a 20 per cent increase in the number of 20-to-34-year-olds living with parents since 1997. An ageing population and spiralling residential care costs are taking their toll too, and families are sprucing up spare rooms and adding extensions to cater for elderly parents. More than 500,000 households now contain three generations, according to the Intergenerational Foundation think-tank, and that figure could reach 556,000 by 2019.

Mark Harris, the chief executive of the mortgage broker SPF Private Clients, says: “'It can make a lot of sense for three generations of the same family to live together under one roof. It kills many birds with one stone – it resolves the problem of getting on the housing ladder for children, while also providing care and companionship for grandparents.”

For young adults, getting on to the property market has never been so difficult. Many are consequently taking much longer to move out of the family home – while the so-called “Boomerang Generation” of recent graduates is returning home after university. Saving up for a deposit is an almost impossible task, with rents increasing across most of the country while wages have stood still and unemployment is still hitting hard at 7.8 per cent.

There are signs of recovery, with mortgage restrictions loosening and interest rates falling to historic lows, but there is still an acute housing shortage and property prices are climbing, making getting a foot on the ladder an even bigger challenge. Londoners are finding it particularly tough, with rent swallowing up nearly 40 per cent of their pay packets and houses costing on average more than six times their salary, according to Nationwide Building Society.

Many of the people who have been able to buy their first home in recent years have had a significant helping hand from their parents, or a large inheritance. For anyone who has to save their own money for a deposit, cutting costs is crucial – and saving hundreds of pounds a month in rent is one obvious solution.

Not every household is ready to welcome their adult offspring and in-laws with open arms, but there are potential benefits for the whole family.

Families that pool their resources can make savings by splitting costs – even in a larger house with high running costs, bills and council tax are usually reduced as you pay only one standard charge. It may be the perfect opportunity to do without one of the family cars, too. The biggest attraction for extended families is childcare savings, if grandparents are happy to help, and likewise there are more hands on deck to share the load of looking after elderly relatives.

If there isn't enough room, mortgage-free grandparents could offer up some of their equity to cover the cost of extending an existing home.

Carol Peett at the County Homesearch Company says: “Pooling resources often means you can get more space for your money, so where a family could only perhaps afford a terraced house with tiny garden on their own, with the injection of extra cash from the sale of the grandparents' house, they can afford a more spacious house with annexe and large garden for the children.” She says old farmhouses are a good bet for multi-generational living, as they usually have outbuildings that can be converted into additional living space.

Any decision of this importance deserves careful consideration, however, and extended families should consult a lawyer and get some tax advice before committing to living together. There are various financial implications: for example, mortgage lenders are wary of lending to people past retirement age so elderly grandparents may not be able to get on the mortgage even if they are contributing a significant amount of cash.

What happens when the children do eventually move out and the grandparents pass away or move into residential care cannot be ignored. Parents who borrow more money to extend their existing home, or buy a larger property, could be left alone in a house that is too big, with a mortgage to cover by themselves. Downsizing again is one option but this would mean forking out for the associated costs, and the stress of selling up and buying anew. Occupied granny flats could pose problems too – they have been exempt from council tax since 1997 but once empty, this relief may be removed and parents could be forced to pay two council tax bills (although this is set to be abolished).

Families need to decide carefully how they plan to own their shared home, as under a joint tenancy, if one owner dies, their share automatically passes to the other, whereas tenants in common can set out where their share goes in a will. It's important to get legal documentation drawn up stating who has contributed what from a financial perspective, so everyone knows where they stand.

David Smith at the independent financial adviser Bestinvest says: “Property ownership can be as tenants in common with ownership split to reflect the financial contribution made by children, grandparents etc. Inheritance tax (IHT) would be payable based on the deceased's proportionate value in the property. There are no capital gains tax issues on selling a principal private residence”.

Grandparents wanting to leave their share of the family home will have to bear in mind that IHT at 40 per cent is payable on assets above the current nil rate band of £325,000 and that includes property as well as money and investments.