The Bank of Mum and Dad.

If only all banks were as charitable as the Bank of Mum and Dad. Parents and grandparents hand over huge sums to younger generations, helping them onto the property ladder and funding them through university. While all loving parents strive to support their offspring, they must avoid jeopardising their own financial future in the process. If you’re in this situation and are unsure how to strike the right balance between your children’s needs and yours, here are crucial questions to ask. 

Should I gift or loan? 

Whether it’s best to loan or gift money to your children is entirely up to you – there's no right or wrong approach. 

I’m sure you’d prefer to make an outright gift. However, if this will plunge you into financial hardship down the line, then a loan agreement might be more suitable. If you do decide a loan is best, this might mean drawing up a contract, which although could make for an uncomfortable conversation, can avoid problems and disagreements down the line. 

Will I have to pay tax? 

Gifting money to your children can be a great way to save inheritance tax. But in some situations, you might still end up with a hefty tax bill from HMRC. There are key taxes to keep in mind. 

Inheritance tax (IHT)

If the gift is below £3,000 (you can also carry forward last year’s allowance if unused) or it is made from normal expenditure, then it will typically escape IHT. 

You can also give as many gifts of up to £250 to as many individuals as you want. Although not to anyone who has already received a gift of your whole £3,000 annual exemption. None of these gifts are subject to Inheritance Tax.

Wedding gifts

In this case, if the gift is to be effective for Inheritance Tax purposes, it has to be made before, not after, the wedding and the wedding has to take place and it has to be:

• given to a child and is worth £5,000 or less

• given to a grandchild or great-grandchild and is worth £2,500 or less, or

• given to another relative or friend and is worth £1,000 or less.

​Anything else means the fgift moves outside of your estate if you survive seven years. If you were to die within this period, the gift would be dragged back into your estate for IHT purposes.

Capital gains tax (CGT)

If you’re planning to transfer a property, business, or portfolio of shares, it's important to be aware of the CGT implications. Any transfer or gift is treated as a normal sale.

Income tax

If you make a one-off withdrawal from your pension pot to hand to your children, you might be hit with an income tax bill. While up to 25 per cent of your total pensions can be drawn tax free, the rest is taxed as income at your marginal rate. In other words, the top rate of tax you pay, which could be as much as 45 per cent. However, your children will not pay any income tax on receipt of the funds. 

What if I’m asset rich but cash poor?

You don’t necessarily need savings and investments to help your children financially. Unlocking the value within your home presents a further option. With equity release, you take out a lifetime mortgage on your home and pay it back either when you die or move into long-term care. You are free to use the lump sum as you please, including gifting it to your children. 

An alternative is a guarantor mortgage. This is where you agree to take on your child’s mortgage repayments if they can no longer afford them. This often involves using your own home as collateral. The benefit here is that your child can secure a home with a smaller deposit, making homeownership a reality sooner. The downside is that you’re on the hook should things go wrong.

How can I protect my wishes?

You may be nervous about making outright gifts. You might be concerned that the money will end up in the wrong hands. For example, you give your child £50,000 to buy their first home. A few years later they get married, but it ends up in divorce. Unless you took steps to protect this gift, £25,000 might pass to your child’s ex-partner as part of the settlement and importantly disappear from the family unit. Fortunately, this situation can be avoided. The key is to take preventive measures at the point of gifting.

A legal document such as a deed of trust can ensure that the money remains in your immediately family, whatever happens in the future. 

How can I ensure any gift is affordable?

You may feel that a gift is affordable right now, but have you considered how it might affect your finances down the line? This is where cashflow modelling comes in. In its simplest form, cashflow modelling is a tool to provide a roadmap of your financial future. You supply a detailed picture of your assets, liabilities, income, and expenses, and these are projected forward to gauge how your finances might look in, say, 10 to 20 years’ time. Cashflow modelling can offer you the peace of mind that anything you pass to your children will not compromise your own financial stability.

If you think you might want to discuss the spirit of any of the points raised in this article, please feel free to contact your usual Dentons Wealth Independent Financial Adviser.