The ‘Bank of Mum and Dad’ has become one of the biggest lenders in the UK, with a reported £6.3bn lent or gifted to family members in 2019. Typically, this financial assistance is to help children access the property ladder. However, with the country facing the prospect of an economic downturn following the COVID-19 pandemic, the Bank of Mum and Dad may be called upon to provide more general financial support.
So, given the current situation, what is the best approach for parents and grandparents to take?
Loans
When giving financial assistance in the form of a loan, it’s important that it is documented and signed by the child/recipient. Details of the amount being loaned and repayment arrangements, including interest (if any), and any other terms should be documented to avoid potential issues further down the line. Without the appropriate documentation, your money could be at risk if your child later divorced, faced bankruptcy, or if they sadly passed away. Consequently, you should also consider securing the loan against property, for example.
What if I later decided I didn’t want the loan to be repaid?
Many loans are made with the intention of writing it off and turning it into a gift at a later date. Many people wish to stipulate that their child’s loan should be taken from their share of any future inheritance. This isn’t an issue, but it should be documented. The release of a loan will be a gift, but it should be effected by a Deed.
Gifts
If you’re considering gifting money to your children or grandchildren, you should always assess the tax consequences before doing so. Gifts play a useful part in Inheritance Tax (IHT) planning. A gift will fall out of your estate for IHT purposes if you survive the gift by seven years.
Before making a gift, you should always consider your own financial circumstances. Despite our natural instincts to want to support our family in times of trouble, thought should also be given to your own financial circumstances to ensure you don’t leave yourself short.
Remember, once an unconditional gift is made, it generally cannot be recalled.
Trusts
Trusts are often viewed as tax planning vehicles exclusively for the rich and famous. This isn’t the case. Trusts can be an extremely useful estate planning tool more widely, and could be a great option if you are considering either loaning or gifting money to your children/grandchildren.
If you need more information – whether our Guide to Trusts, or our Guide to IHT Planning through gifts, or otherwise – please don’t hesitate to get in touch.
