Over the last few years, rising house prices have made it tougher for younger buyers to get onto the property ladder. This has led to the rise of the so-called “Bank of Mum and Dad” providing billions of pounds to help their children to buy their first home.
Indeed, Savills analysis, published by MoneyAge, estimates that 470,000 first-time buyers will receive financial help from a parent or other family member in the three years to 2024, with the Bank of Mum and Dad providing an eye-watering £25 billion in financial assistance.
It’s not just parents who are helping. Aviva reports that grandparents are also increasingly providing financial support to their grandchildren, with 1 in 4 grandparents saying they have, or are going to, help grandchildren become first-time buyers.
If you’re thinking of opening to the door to the Bank of Mum and Dad (or Grandma and Grandad), here are three questions you should ask first.
1. Can I afford to help?
The research from Aviva found that grandparents were, on average, giving £31,398 to grandchildren to help with a property purchase. Separate research published by the Daily Mail suggests parents were providing a similar amount of support – around £32,400.
While gifting or lending loved ones the money to help them buy their first home can be rewarding, you do need to look at the long-term picture. Will writing a cheque affect your current or future standard of living?
Once you have handed over money it can be hard to get it back, so you need to be sure that you can afford any assistance you provide.
One way we can help with this is to use cashflow modelling. We can look at all your assets, income, and expenditure and forecast how giving financial assistance now will affect your future financial position.
This can give you the confidence to make decisions about providing support, safe in the knowledge that you can afford to do so and maintain your progress towards your own goals.
2. Is the money a gift or a loan?
If you’re thinking about providing assistance to a child or grandchild, it’s important to lay out your expectations – is the money a gift or a loan?
Gifting the money to your child is one way to help them onto the property ladder – but remember that there can be tax implications.
If your estate is subject to Inheritance Tax (IHT), your gift could incur an IHT charge if you die within seven years of handing over the money. If you survive for seven years after making the gift, it will no longer form part of your estate, meaning no IHT is due.
Another concern that you may have when making a gift is that any money you hand over may not ultimately end up with your intended beneficiary.
For example, you might make a gift to your child but, if they separate from their partner, part of this gift might end up with an estranged spouse. Read more below about how you can tackle this potential situation.
So, instead of making a gift, a loan may be a useful option. It allows you to keep some control over the money, and there is an understanding that this money will be repaid to you.
It’s important to remember that a loan could still be subject to IHT because it will count as part of your estate when you die. A loan will only be exempt from IHT if you decide to waive the debt and gift the money instead – and assuming that you live for at least seven years after making the gift.
Bear in mind also that, while most parents choose not to charge their children interest on a loan if you do, you could be taxed on the interest because it will be treated as income.
3. Do you have the right paperwork in place?
One of the main criticisms of the Bank of Mum and Dad is that parents rarely “act like a bank”. So, whether you decide to gift or lend money, it’s vital that you get the right paperwork in place.
Caroline Holley, a partner at law firm Farrer & Co, recently told FTAdviser: “Increasingly, we’re seeing parents raising concerns about how to protect funds provided to children, often to help them get on the property ladder, and this has led to more structured methods of releasing funds from the Bank of Mum and Dad”.
It may seem overkill to formalise a family agreement, but this can help to manage expectations and avoid family disputes and conflict later on.
So, when you are planning to provide financial support, agree the details of how this would take place:
- Is it a loan or a gift?
- If it is a loan, put a repayment schedule in place
- Agree in advance what would happen if the couple split up.
Many experts recommend that a Living Together Agreement is prepared, particularly if your child is unmarried and buying with someone else.
This gives you the opportunity to sit down with your child and their partner to discuss (and record) details of the financial contribution you plan to make, and what will happen if the relationship were to end.
If your child also intends to allow another person (for example, a partner or friend) to live at the property, it is a good idea to create a Tenancy Agreement, as well as a Living Together Agreement. This helps to set out the rights and responsibilities of each party.
As well as making it clear who owns the property, it also sets the expectations for meeting the costs of living.
Get in touch
If you are considering providing financial support to a family member, and you’re not sure of the implications for you, please get in touch. Email firstname.lastname@example.org or call 0161 8080200.
The Financial Conduct Authority does not regulate estate planning, tax planning or will writing.
This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.