How To Be A Prudent “Bank Of Mum And Dad”
This content is for information purposes only and should not be taken as financial advice. Every effort has been made to ensure the information is correct and up-to-date at the time of writing. For personalised and regulated advice regarding your situation, please consult an independent financial adviser here at Castlegate in Grantham, Lincoln or other local offices.
It’s a well-known fact that, in recent years, increasing numbers of younger people have been turning to their parents for help with their house deposit. Indeed, in 2013 the average UK house price stood £180,548 yet by 2018 it was £248,233 – outpacing earnings growth each year by 11%. Rather than costing, say, three or four times the annual wage which was commonly the case with the “baby boomer” generation, today a house in the UK can cost over seven times a millennial’s salary. It’s little wonder that many turn to their parents and grandparents for help!
Yet being the “bank of mum and dad” often comes with its own challenges, both in the financial and relational senses. Here at Castlegate, our Lincolnshire financial advisers offer their insight below about how parents and grandparents can navigate this area wisely. We hope you find this content useful and informative. If you would like to discuss your own financial plan a financial adviser in Lincoln, please get in touch to arrange a no-obligation consultation, at our expense:
The importance of formalisation
If you were to step into a bank and ask for money, both you and your lender would ensure that a proper paper trail was in place for everyone to refer to. Yet families often neglect this vital step when it comes to giving – or lending – money to children and grandchildren for university, to help cover wedding costs or for a house deposit. The result is often miscommunication and, in worst cases, relationship breakdown due to disagreements over the terms of the agreement. As such, in our experience with clients across Lincolnshire, our financial advisers would suggest:
- Making sure all communications between you and your child/grandchild on the subject are written down and easily accessible. Email trails can be especially useful here.
- Agree at the beginning whether the money is a loan or a gift.
- Set a mechanism in place for regular repayment.
- Agree together what the process would be if your relationship broke down.
The latter point can be particularly hard for families, especially if you have a close relationship. Nonetheless, we suggest bringing this up in a sensitive manner if at all possible.
Things can be complex enough for parents and grandparents who wish to give or loan money to one descendent. Yet the reality is that, in 2020, many young people are unable to afford a house deposit without moving in with a partner, sibling or close friend. For the “bank of mum and dad”, this can bring up more issues – especially if your child/grandchild is not marrying the person they want to move in with (from a financial perspective).
Here, it can help to consider crafting a Living Together Agreement if you plan to help your child onto the housing ladder with a partner. This gets everyone to sit down together and discuss the gift/loan you are making to their home, and what would happen if the relationship did not last. This makes it clear who owns what, how repayments will be made and what process will be followed in the worst-case scenario – solidifying mutual respect and peace of mind.
The importance of advice
Many parents and grandparents do not involve a financial adviser in their decision to gift or loan money to their child, believing it can all just “stay within the family”. This is understandable, yet it is wise to at least consider professional advice given the potential implications for your tax and estate planning. One Telegraph report showed that 20% of retired people in the UK are risking their pensions with ill-planned financial gifts to descendants, with one quarter stating that, as a result, they no longer felt confident that their finances would last in retirement.
There are also important inheritance tax (IHT) issues to consider when making gifts to a family member. At the very least, gifts need to be carefully documented with clear, accurate written records which might later be examined by HMRC. Bear in mind that, in 2020-21, you can give up to £3,000 per year to a child or grandchild without the gift being counted as part of your estate (within the last 7 years). This rule applies even if you release funds to your family member as a “loan” with the promise of repayment. You are able to make extra tax-free donations in certain situations, such as putting money towards a child’s wedding. Another option is to think about putting money into an appropriate trust, which can help shield it from IHT and release the funds only under certain conditions (e.g. the money is only used for a house deposit or for home improvement).
Granting much-needed cash to your loved one for an important life event is a common and noble thing to want to do. Yet it is rarely as simple as just writing a check and forgetting about it. There are typically important financial planning and tax implications to consider, as well as “what if” scenarios where contingency measures are required to help protect everyone involved.
If you are interested in discussing your own financial plan or investment strategy with us, please get in touch to arrange a no-commitment financial consultation at our expense: