A baby born today would need more than £500,000 to buy their first home when they reach 31 – the average age of first-time buyers, according to research by estate agent Lomond. This is up from the current average house price of £237,655 paid by first-time buyers today.

Those buying in London would need £1 million, it found. The figures are based on historic house price growth over the past 31 years, and assume that prices will see the same level of growth over the next 31 years.

Should these figures prove accurate, a baby born today would need around £75,000 for a deposit of 15 per cent – and to be earning a massive £95,000 a year to get a mortgage that is a typical four and a half times their income.

Even accounting for inflation, this is a substantial leap from the current average full-time wage of £34,963 a year.

Of course, there is no guarantee that house prices will follow the same trend as they have in previous years. Nonetheless, it is likely that first-time buyers in future will need deep pockets to get on to the property ladder. And as today, many may struggle to do so without help from family members.

One way to decrease the chances of an inheritance tax bill later on is to place the savings into a trust for your child or grandchild

One way to decrease the chances of an inheritance tax bill later on is to place the savings into a trust for your child or grandchild

Finding a large lump sum to help with a deposit for a first home is a big ask for most families. But starting to save early is a bit more manageable. Squirreling away £85 a month for a child or grandchild born today could get you £75,000 by the time they reach the age of 31 assuming you achieve annual returns of 5 per cent and reinvest the interest.

Laura Suter, director of personal finance at AJ Bell, says: ‘In the daily scramble of parenting it’s easy to put sorting out your child’s savings at the bottom of your list, but putting a bit of money aside each month can give them a tidy sum when they are older.’ So, where should you save the money?

Your first option is a straightforward children’s savings account. You can make a monthly deposit or add lump sums and when they hit 18, they will have control of the account. The best account on the market is from Coventry Building Society paying 5.25 per cent interest.

However, there are several problems with this option. Firstly, if you are the child’s parent and the account earns more than £100 interest a year it will count as your money for tax purposes.

It will form part of your Personal Savings Allowance and if that exceeds £1,000 a year for basic-rate taxpayers (£500 for higher rate earners) it will be taxed as part of your income.

The way round this is to place the money in a Junior Isa instead. Here, all investment returns and savings interest is tax-free.

The best Junior Isa is also 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. Then money belongs to them and they can choose how they manage or spend it. The next issue is growth. If you are saving on behalf of a baby or small child in the hope the money will help them buy their first home, you are looking at a very long time.

The best account on the market is from Coventry Building Society paying 5.25 per cent interest

The best account on the market is from Coventry Building Society paying 5.25 per cent interest

Gains will be higher if you invest the money rather than hold cash, due to the erosion of inflation.

‘A 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 to produce returns that outstrip inflation than the interest you get on cash savings.

‘Most Junior Isas are going to be inherently long term because they cannot be accessed until the child is 18, so there is ample time for the inevitable short-term bumps in stock markets to be ironed out.’ If you are concerned about your child getting their hands on the money in their teens, as they would with a Junior Isa, then another option would be to save into an account in your own name. That way you can choose when you give them the money.

‘For those who don’t use the full £20,000 a year adult Isa allowance, ringfencing funds within that could be a good way to save for your child,’ says Jobson. If you choose to keep the savings in your own name, be aware that this could cause an issue with inheritance tax in the future.

Any financial gifts above the annual £3,000 gifting allowance would still be classed as part of your estate for inheritance tax purposes if you were to die within seven years of the gift.

Everyone has an allowance that allows them to pass on gifts of up to £325,000 free of 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 incur inheritance tax at 40 per cent.

There are a few ways to gift cash during your lifetime to reduce the bill.

A way to decrease the chances of an inheritance tax bill later on is to place the savings into 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 set up, so the seven-year countdown could start now rather than years in the future, giving you more chance of surviving long enough to eliminate any threat of inheritance tax on the sum in the trust.

Plus, you would have gifted the money while it was still a relatively small sum, before growth had made it more likely to have any impact on your estate for inheritance tax purposes.

This post first appeared on Dailymail.co.uk

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