Bank of Mum and Dad: No repayments necessary

Posted on November 23rd, 2017 | Categories - News

Bank of Mum and Dad No repayments necessaryLess than a third of parents who plan to lend money to their children in the future expect to be repaid.

According to research from Prudential, many parents are giving substantial amounts to their adult children, without the expectation of being repaid in full (or anything at all). On average, people who have helped their children or grandchildren financially are owed £12,700, whilst 11% of parents have handed out loans in excess of £20,000.

There are many reasons for parents to lend money to children and, as expected, buying a house tops the list at 39%. Government data shows that 34% of first-time buyers are relying on help from their parents to secure a property, so no surprise there. Other reasons for loans include:

  • Buying a car 28%
  • General living expenses 21%
  • Student debt 16%
  • Credit card debt 16%

Prudential’s research focused on parents and revealed that:

  • 68% have already loaned money to their children
  • 32% hope to be able to act as their children’s preferred lender in the future

Regarding repayment of those loans:

  • 37% of parents who plan to lend to their children in the future admit that they are unlikely to be repaid
  • 44% of parents who have already made cash loans feel that they are unlikely to see that money again

Can you afford to act as a lender to your children?

It is natural to want to help your children or grandchildren to get started in life. But first, you need to consider both the immediate and long-term implications it may have on your personal finances. Your money works better in an account you have control over.

However, as a parent, it is only natural to put your children’s needs and livelihood first. To get the best of both worlds, you need to make sure that you can provide the help they need, without putting your own finances in jeopardy.

How?

Financial planning.

A financial planner will be able to investigate your current situation, forecast your future finances and develop a plan which allows you to reach your financial goals. By setting out the financial forecast for your lifetime, you can see clearly whether losing the amount loaned to children – for good – will negatively impact your life down the line.

If you can afford to lose the amount on a permanent basis – any repayments you do get become an added bonus on a clear financial plan.

If you don’t need or want the money back, consider Living Inheritances instead

If you are giving lump sums away with no expectation or want of repayments, why even call it a loan? At this point, be frank and give the money to a loved one as a gift.

This can even help with reducing the Inheritance Tax (IHT) payable when you die, as it may count as a:

  • Potentially Exempt Transfer: These are gifts which attract a lower IHT rate for each year you live after giving it away. After seven years, the gift is outside of your estate and will incur no IHT when you die
  • Gift from Income: You can make regular gifts to one or more people, which are immediately considered to be outside of your estate for IT purposes, as long as they form part of an ongoing arrangement and do not detract from your usual standard of living
  • Annual Exemption: Each year you are able to give away a certain amount without incurring any IHT

To learn more about lending money, giving gifts and financial planning, contact us on 0115 9338433.

The Financial Conduct Authority does not regulate Inheritance Tax Planning