Bank of Mum & Dad: How to help your kids and protect your wealth
With generous lending conditions, high rates of forgiven loans and a personal relationship with the branch managers, it’s no wonder it’s so popular with customers. But what about the impact on the bankers themselves?
Handing money over to your children is a major decision, and a large number of our customers come to us seeking advice on how best to help out children – in particular helping them onto the property ladder – while protecting their own finances. With average UK house prices at around £275,000 (as much as £521,000 in London), minimum house deposits can run into tens of thousands of pounds.
Pension freedoms and funding your retirement
As more people consolidate their pension pots and move money around, some have chosen to use a portion of their retirement funds to help their children.
We would advise caution – it is important to ask yourself (and ideally a regulated adviser) if doing so will leave you unable to fund your retirement. Very few people have more in their pension funds than they will need to meet their future income requirements during a potentially very long retirement. And once you are retired, you are unlikely to be able to generate significant levels of savings.
With this in mind, it is important to decide whether you can afford to gift money, or if it would be more suitable to offer a loan. If it’s a loan, you must consider the likelihood of it being repaid.
How to gift and make loans
If you can plan ahead of your child’s intended property purchase, you might be able to make regular financial gifts over a period of time. If this is funded from your surplus income, which could include dividends from an investment portfolio, it could well be exempt from inheritance tax under current tax rules.
If gifts are made using your £3,000 annual exemption, this will also be outside the scope of inheritance tax. Giving away money reduces the value of your estate, and potentially its inheritance tax liabilities, but you need to be certain that you can afford to make the gift.
More significant gifts will generally fall outside of your estate after seven years, but if you pass away during this period, it could attract inheritance tax. With this scenario in mind, we often suggest writing an accompanying letter to your child, setting out the date and value of the gift, and perhaps the purpose for which this is intended. This can be helpful for your executors.
Importantly, making a gift to your child should not affect the mortgage they are offered. The mortgage lender must be satisfied that your child can repay the loan, even if interest rates rise, and it can be helpful to speak to a regulated mortgage adviser.
If you will need the money back at some stage or are unsure about whether you will need it back, a simple loan agreement can be signed by all parties and witnessed independently. This agreement could include the terms under which the loan will be repaid, whether interest is payable and on what basis, and in some cases a stipulation as to the purpose of the loan.
Over time, you might choose to ‘forgive’ part or all of the loan, ultimately making a gift of the money instead. It can be helpful to set expectations in advance, but of course this is not always achievable. If you do decide to convert all or part of your loan into a gift, the seven-year period relating to inheritance tax would begin at the point of the loan’s forgiveness.
Keeping it in the family
We advise that, as far as possible, you discuss matters like these openly within your family. If you are not able to help your children financially, it is usually helpful to make this clear early on.
If you’re concerned about mixing your finances with your child’s partner’s, there are options to mitigate the risks – from co-habitation agreements for live-in partners, to prenuptial agreements for spouses. If you’ve made a substantial contribution towards your child’s property, it could be a good idea to encourage agreements like these, and to seek legal advice for your own (and their) peace of mind.
Many other factors can play into decisions on intergenerational financial support. If you are divorced or separated from your child’s other parent, it may be that one of you is in a better financial position. If you have more than one child, you might want to offer more financial help to one than another because of their earning power.
While these conversations can be daunting, we normally advise being as transparent as possible. All families are different, and it is important to find the arrangements that work best for you.
Christine Ross is client director at Handelsbanken Wealth Management