In recent years, it’s become more and more difficult for first-time buyers to get onto the property ladder. Thanks to the ‘mini-boom’ in house prices following the first UK lockdown in 2020, this shows no signs of abating, with the BBC reporting that property prices climbed by around 7% in 2020, the highest growth in six years.
If you have children who are looking to get on the housing ladder, you may be tempted to give them a helping hand as many young people struggle to afford a deposit for a home. But, before you start writing a cheque, here is all you need to know if you’re thinking of becoming the Bank of Mum and Dad.
Ensure that your gift won’t significantly impact your financial goals
One of the most important things to consider if you’re considering helping your child financially is whether your loan or gift will affect your financial stability.
Whilst you may want to help your child to afford a deposit, if you loan or gift too much then it could impact the chances of you meeting your own financial goals.
This can be a particular issue if you are planning to dip into your retirement savings. If you take too much from your savings, you may find that you may need to reassess your retirement plans as you may not be able to afford the lifestyle in retirement that you want.
To ensure that you can afford to help your children with a deposit, you may want to speak to a financial adviser. An adviser can help you assess the state of your finances to work out how much you can afford to help while still meeting your financial goals.
Consider the tax implications of your gift
If you are gifting the money to your child instead of loaning it, you may need to consider the tax implications.
In the 2020/21 tax year, your gifting allowance is £3,000, meaning that you can gift up to this amount without the value of your gift being subject to Inheritance Tax. You can roll this allowance over into a second year if it is unused, but only up to £6,000.
If you’re considering gifting, it is important to bear in mind that if you were to pass away within seven years of making the gift, there could be an Inheritance Tax bill to pay.
If you are concerned about the tax implications of your gift, seeking professional financial advice can help to give you some peace of mind.
Formalise your lending to prevent future disputes about repayment
If you would prefer not to simply gift the money, you could consider a loan. According to the London School of Economics (LSE), around a quarter of people whose families helped them financially in this way were loaned the money.
Whilst it may seem a very formal thing to do, putting the agreement in writing can help you to avoid problems down the line. For example, arguments such as when the loan needs to be repaid by can potentially cause significant damage to a parent/child relationship if not clearly laid out.
If you want to help your child and avoid potential future arguments about repayment, you should definitely consider seeking professional advice and putting the transaction in writing.
Speak with your child about a Living Together Agreement
A common concern that parents have is that if their child is living with a partner, a future break-up could mean the financial support they provided ends up with a third party. If this were to happen, the parent may have to sue the child to get their money back. According to solicitors Osbornes, cases such as this have tripled since 2016.
Research by insurers NFA Mutual, reported in the Telegraph, revealed that almost half of parents with adult children said that lack of trust in their child’s partner would affect their willingness to help them financially.
If you want to ensure that your gift ends up solely with your child, you may want to consider speaking to them about a Living Together Agreement. This document is a written record of who owns what in a shared household and can be a good way to encourage your child and their partner to sit down and plan for a worst-case scenario.
If your child and their partner want to marry, you could also speak to your child about arranging a pre-nuptial agreement. This document sets out how their assets would be divided if they were to divorce. If your child and their partner are already married, they would need a post-nuptial agreement.
Consider speaking to a financial adviser
According to the study by the LSE, nearly a quarter of parents surveyed admitted that they had concerns as to how a gift would impact their own finances. Despite this, the survey also found that very few families would seek professional advice before gifting or loaning money.
Working with a financial adviser whilst acting as the Bank of Mum and Dad can help you to tackle issues such as:
- The repayment arrangements of the loan
- Whether you, as a lender, have a say in what happens to the property
- What would happen in the event of an unexpected death before the loan is repaid.
If you want to help your children by becoming the Bank of Mum and Dad, working with an adviser can be essential for giving you peace of mind. An adviser can ensure that your gift or loan ends up with its intended recipient and that your own standard of living will not be affected.
Get in touch
If you’re considering gifting or loaning to money to your children for a deposit and want to ensure that you help them in the most effective way, please get in touch. Email firstname.lastname@example.org or call us on 01785 876222.
Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor. The Financial Conduct Authority does not regulate tax advice or estate planning.