As the housing market freeze is lifted in England, the Bank of Mum and Dad is set to reopen too.
In 2019, Legal and General confirmed that the average parent contribution to help a child onto the property ladder was £24,100.
The same Legal and General report states that the Bank of Mum and Dad lent £6.3 billion in 2019. In some cases, the amounts won’t have been a loan, but a gift, and for some families, this distinction might not have been made clear at all.
Whether your child is looking to buy their first home or needs help to make up an income shortfall during the current crisis, you might be preparing to offer financial assistance.
There are many questions you need to ask yourself before you open the doors to the Bank of Mum and Dad.
Here are three of the most important:
1. Are you providing a gift or a loan?
Ask yourself at the outset whether the money you are handing over is a gift or a loan. It’s an important distinction and the implications are clear.
If you are providing a gift, you have no intention of asking for the money back. A loan, on the other hand, however favourable the terms, is made with the understanding that the payment will be returned.
Be sure you know which it is and that your child understands this too.
If you are providing a loan, the loaned amount remains part of your estate for Inheritance Tax (IHT) purposes. Be aware that if the loan is made interest-free, it could be treated as a gift by HMRC. Making the loan ‘repayable on demand’ could prevent this but speak to us if you’re unsure.
If the money is a gift or an interest-free loan, you’ll need to consider the impact of IHT:
- If your estate is subject to IHT, your gift could become liable for a tax charge if you die within seven years of the gift being made. This could be as much as 40% if you die within three years of making the gift, reducing on a sliding scale if you were to die within three to six years of the gift being made.
- If you plan to gift money in the future, you might consider making a series of smaller gifts. You can gift £3,000 annually, tax-free, and the allowance can be carried forward for one year. It also applies per individual so you and a partner could gift £6,000 a year, or £12,000 if you didn’t gift anything last year.
If it’s a loan, be sure you have the necessary paperwork in place. The Bank of Mum and Dad isn’t regulated, nor is it a real bank. It can be easy to forget the importance of knowing the terms and conditions of the loan and having them written down.
Ask yourself these questions:
- How and when will repayments be made?
- Who is the loan to? Your child, or a child and their partner?
- If your child is moving in with a partner, what happens if that relationship breaks down?
The most important thing is to discuss these questions early in the process and be sure each party understands the answers, and their implications.
2. Do you need to seek legal advice?
Understanding the sometimes complicated terms of a loan might mean a formal contract, which in turn, might require legal advice. Even if you’re providing a gift, you may want to know what happens to that gift if circumstances change in the future.
Questions you’ll need to consider include:
- Do you want to stipulate how the money should be used?
- Will you have any rights to the property?
- What happens if the property value goes up?
- Do you want a say in what happens to it in the future?
- What happens if you or your partner die?
These are important questions and the answers might not be straightforward.
Paying for legal advice at the start of the process forces you to think about the answers to questions you might not have thought to ask. It could save you a large sum in legal fees if something goes wrong later.
This can be a complicated area so speak to us if you’re unsure. We can help you decide if a loan or a gift is right for you and point you in the direction of trusted professionals if further help is needed.
3. Can you afford it?
Arguably the most important question you should be asking yourself before you open the Bank of Mum and Dad is can you afford to provide your child with money, whether it’s a gift or a loan?
Being able to afford it means more than simply having sufficient funds, or the capacity to raise those funds. You need to be sure that you can provide the money and maintain your desired standard of living.
If you’re considering downsizing, equity release, or using your pension savings to help provide for your child or grandchild, be sure you understand what this will mean for your retirement.
The Money Pages recently reported that ‘around 40%’ of parents who helped a child onto the property ladder saw their living standards detrimentally impacted.
It’s crucial to balance your desire to help loved ones with a solid financial plan based on your retirement goals. You need to be sure you leave yourself enough money to live on comfortably, whilst retaining an emergency fund to cover the unexpected.
Get in touch
Opening the Bank of Mum and Dad is a big decision and it’s important you think about all possible eventualities before you commit. That means having difficult conversations, understanding the nature of the gift or loan, and knowing if, how, and when the money will be repaid.
Having these discussions early should give all parties peace of mind that the decisions that are made are right for everyone.
If you’d like to discuss any aspect of providing a child with a gift or a loan, get in touch. Please email info@investmentsense.co.uk or call 0115 933 8433.
