As the UK lockdown begins to ease, the suspension of the housing market has been lifted too. If your child is looking to get onto the property ladder this year, now might be a great time to give them the financial assistance they need. But there are important questions to ask before you open the doors to the Bank of Mum and Dad.
According to a Legal and General report, parent’s lent their children £6.3 billion in 2019. Of those questioned, 40% confirmed that the decision had had a detrimental effect on their finances and their standard of living.
You’ll instinctively want to help your children but be sure to ask yourself some questions at the outset. Knowing the answers, and having frank discussions with your child, could avoid financial or legal issues in the future.
So, what are the five main questions you need to ask yourself?
1. Can you afford it?
This question is about more than just the monetary amount. You might be able to release funds from your pension, via equity release or through downsizing. But you need to weigh finding the money against your standard of living once the amount has been raised.
Your pension, once accessed, must last the rest of your life. Likewise, downsizing and equity release should only be considered alongside your long-term financial goals.
If you’re still working, what will happen when you retire? Will you still have an emergency fund? What about the potential cost of your own later life care? If the money is a loan, what will happen to your child’s ability to make repayments if grandchildren arrive?
These are only some of the factors you’ll need to weigh up before you decide if you can afford it. We can help you revisit your plan and look at the implications of giving financial assistance to a child or grandchild.
Get in touch before you make any big decisions and we can help to reassure you, whatever your decision.
2. Is it a gift or a loan?
Deciding whether or not you can afford to help your children onto the property ladder will be largely dependent on one factor – whether the amount is a gift or a loan.
Conversations about financial matters can be tricky but both parties must understand the answer to this important question, and its implications.
If the amount is a gift, you’ll need to decide whether it comes with any stipulations, such as a guarantee that it is used solely for a deposit on a house. If it’s a loan, you’ll need to think about repayment structures and interest.
The tax treatments for both options will be different too.
3. What are the tax implications?
From April 2020, an individual can leave an estate valued at up to £325,000 plus the new ‘main residence’ band of £175,000 giving a total allowance of £500,000 per person.
If you gift money to your child there is no tax to be paid on it immediately, but liability could arise if you were to die within seven years of making the gift. If your estate is above the Inheritance Tax (IHT) threshold, you might be liable for tax at 40%, with a sliding scale if you die between three and six years from the date of the gift.
You can gift up to £3,000 each year tax-free, and the allowance can be carried over for one year. It is also per individual. This means that if you and your partner both have an unused allowance from last year, you could gift up to £12,000 tax-free.
If you are loaning money to your child, the amount still counts towards the value of your estate for IHT calculation purposes.
If you charge interest on the loan, Income Tax will be payable. You might need to complete a self-assessment tax return if your Personal Savings Allowance is exceeded. For the 2020-21 tax year, Basic Rate taxpayers can earn up to £1,000 in savings interest tax-free. The allowance is £500 for Higher Rate taxpayers.
If a loan is made interest free, HMRC may deem it a gift. Making the loan ‘repayable on-demand’ could prevent this. The process can be complicated, so speak to us if you’d like to discuss the tax implications of gifting or loaning.
4. What if your child’s relationship status changes?
Although you are providing money to your child, they may be moving in with a partner. This could cause issues in the future if the relationship breaks down.
Depending on the amount and proportion of money you are putting towards the house, you might want a smaller or larger say in how the property is held.
If you are providing your child with their half of a deposit, for example, the property might be held via Joint Tenancy, between your child and their partner. Both parties have equal rights to the property and any profit made, should it be sold in the future.
If your contribution is disproportionately high, you might want a guarantee in place that a future sale won’t leave you missing out on a fair percentage of any profit.
A property held as Tenants in Common sees both parties specify their share at the outset. Money raised from the sale of the house is split according to this share.
You might also be able to request a Declaration of Trust Beneficial Interest. This clarifies the exact amounts provided by all parties and is legally binding.
These might not be easy discussions to have but planning for every eventuality is crucial.
5. Do you need to seek advice?
Lending or gifting a significant amount of money to your child will impact your financial plan and your ability to meet your long-term goals.
Before you agree to help a child onto the property ladder you must understand where the money will come from, how and if you expect it to be paid back, and whether your standard of living will be detrimentally affected.
We can talk you through your current financial situation and look at the possible impact of a large gift or loan. We can also help you understand how future changes in circumstances – both for you and your child – might affect the amount of money you decide to lend or receive back.
Legal advice is crucial too, and we can point you in the direction of trusted professionals who can help to ensure you are covered against all eventualities.
Get in touch
If you’re contemplating opening the Bank of Mum and Dad and would like help with any aspect of the decision-making process, please contact us today.
The Financial Conduct Authority does not regulate estate planning, tax planning or will writing.
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