There’s a lot to consider before you decide to open ‘the bank of mum and dad’ and provide financial support to your children
As things like housing and living costs become more expensive, more children are turning to their parents to support them with their finances.
But, while parents can play an important part in helping their kids out – whether it’s for general financial support, helping them to buy their first home or to contribute to the cost of something big, like their wedding – there are a few things to think about to make sure everything goes as smoothly as possible.
Decide whether the money will be a loan or a gift
Disagreements can happen when money’s handed over without both sides completely understanding the arrangement. For instance, parents could offer money believing it’s a loan to be repaid, but the child may see it as a gift.
Although it can seem a little formal, setting out expectations in writing can save a lot of stress later on, especially if you’re lending a large sum. It means both the parents and child fully understand what’s expected of them before any money changes hands – you can seek legal advice to help draft the paperwork if you’re unsure about anything.
If you decide to help out on a more casual basis, or with smaller amounts of money – lending £200 to pay for an unexpected bill, for example – it’s still important to set expectations. Make sure your children understand your financial position, and if you will need the money back by a certain time.
Work out if you can manage without the money long term
When deciding to give away or lend money, it’s worth considering that financial circumstances could change. Children may initially be able to afford repayments, but what if they have children of their own or something else changes in their life which means they can’t repay the debt?
You could also find yourself in a different position. A divorce, or time off of work due to ill health, can mean your finances become stretched. While lending money now may be affordable, you should consider how a major life change could affect your finances later on.
Think about any tax problems
There are a few tax issues to consider before deciding to loan money to your children.
If money’s handed over as a gift then inheritance tax (IHT) could be charged if the giver (the parent) dies within seven years of giving the gift and their estate is worth more than the current £325,000 limit. But remember that there are a few different allowances for gifts available, so reading up on these and keeping a record of what gifts were made and when can be useful. You can find more information about IHT and tax-free gifts on the Money Advice Service website.
If you’re lending your children money to buy their first home, it’s worth noting that parents who are named on the deeds of their child’s house, while already owning a different property, may find they’re charged the higher rate of stamp duty that applies to second homes. You can read more about stamp duty on the Money Advice Service and Which! websites.
Capital gains tax
Finally, parents who’ve helped their child buy a house and have a share in their property may also have to pay capital gains tax if the home is sold at a profit later on. You can learn more about capital gains tax at GOV.UK.
Consider how the repayments will work
Even if you lend money to your child and agree on when and how the repayments will be made, it’s important to consider that they might not be able to keep them up. Time off work, or the loss of a job, could have a big impact on whether repayments can be made.
If you find yourself in this situation, it could affect your relationship with your child and you might find yourself under increased financial pressure as a result. So it’s important to ask yourself how you’d cope financially if you didn’t get the money back.
Think about what would happen if your child’s relationship status changed
If you’re helping your child to set up a home with a partner it can be a really exciting time, but what happens if they split up? While it can be a hard topic to broach, it’s important to talk about before providing any financial support. Properties can either be held by ‘joint tenants’, where both people own an equal share, or ‘tenants in common’, where people can agree and specify their share of the property. If the property is sold, each partner would receive their share.
If parents have contributed towards a deposit, then you should seek legal support to get something called a ‘declaration of trust beneficial interest’ in place. This legally binding document explains what each person has paid towards deposits, fees or mortgage payments. If your son or daughter were to split up with their partner, there’s then a legal record of who has paid for what.
Cohabitation and pre-nuptial agreements can also be useful for setting out how any assets should be split in the event of a break-up. It’s worth speaking to a solicitor about how to get this documentation.
Make sure you’ve got all the information you need
Making the decision to hand over a large sum of money, whether as a loan or a gift, is a major financial commitment. By planning ahead, considering the various options and making sure you’re clued up on any issues, you can help your children out while protecting your own financial wellbeing. And remember there are other ways you can support your children too, especially when it comes to getting them onto the property ladder. You could act as guarantor, for instance, or use equity release. It’s a good idea to seek financial advice to help work out the best way to do this.
Find out more about lending money to your children
Our Good with your money: Five things to consider before opening up a branch of 'the bank of mum and dad' guide gives lots of hints for areas to think about.
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