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Gifting money to children: what parents need to know

Paloma Kubiak
Written By:
Paloma Kubiak

The Bank of Mum and Dad is a growing industry, but many parents are still confused over the rules on giving a lump sum to their children.

Over three quarters (76%) of all parents aged 55 and over find gifting rules complicated, and they are concerned about making a mistake, according to Key.

The equity release firm found nearly a quarter (24%) worry they don’t have the knowledge to make the right financial decisions as the Bank of Mum and Dad.

In addition, 78% would welcome tax incentives for gifting to children providing the money is used for major life events, such as a first property purchase, university fees or to clear debt.

Dean Mirfin, chief product officer at Key, said: “Older homeowners in the UK own as much as £1 trillion in housing wealth according to our estimates and are also likely to have generated significant pension wealth as well as other retirement savings. The challenge for parents wishing to lend or gift money is to decide which assets are the most appropriate and most tax-efficient for gifting. We believe advice is key.”

What you should do

Mirfin lists these eight top tips for parents considering loaning or gifting to their children and grandchildren:

1. First of all, it’s good to talk. Money can be a taboo subject. Don’t let it be. Talk about exactly what you can afford and what is fair. Make sure it is clear from the beginning whether the money you are giving is a gift or a loan. It can be confusing and could lead to an embarrassing conversation if this is unclear from the start.

2. Seek professional advice. Independent financial advice and also legal advice will give you the peace of mind that you are making the right decisions.

3. It’s also important for the recipient to be open about who the money will benefit, i.e. spouses. We all know how complicated families can be so it’s important to be transparent from the beginning about who exactly will be receiving and benefitting from the money, particularly if it is going towards a joint house purchase.

4. If you are giving all or part of the money on a loaned basis, it is worth drawing up a contract outlining repayment terms. No matter how lenient or relaxed you may initially be about receiving the money back, circumstances can change and its useful to have the agreement in writing.

5. Don’t be afraid to say if you are intending for the money to be spent on something in particular, such as helping towards a property purchase. If you are giving the money to help towards a house deposit, consider helping the recipient put it into a Help to Buy ISA or releasing the money only when they’ve found the house they want to buy.

6. Be aware of tax implications. You can gift any amount of money you like to your children without being taxed immediately or potentially at all, however if you pass away within seven years of the transaction there could be tax implications.

7. Many older people have developed wealth from property, pension assets and other retirement savings including ISAs. It’s important, if you are considering a loan or gift, to consider which assets are best to access and this is where advice is vital.

8. Finally, think carefully about whether it is financially viable for you to gift money to family members. It’s vital to carefully consider your own financial future before thinking about gifting or loaning money. Your retirement income, potential cost of care and house refurbishments are the sorts of things to factor in to your decision. If you are unsure, seek the advice of a professional adviser.

Related: See YourMoney.com’s The perils (and benefits) of signing over your house to the kids for more information.