This content is for information and inspiration purposes only. It should not be taken as financial or investment advice. To receive personalised, regulated financial advice please consult us here at Elmfield Financial Planning in Padiham, Burnley, Lancashire.
According to one study, around two-thirds of UK parents have helped their children with a mortgage deposit, averaging at £32,440. Nearly a quarter say that, without their financial help, their children would never have made it onto the housing ladder. A third of parents also provide ongoing support with rent or mortgage payments, with 28% providing ad hoc financial support (e.g. clearing a personal debt). As parents of adult children, therefore, there is a good chance that, at some point, you will end up playing the role of “bank of mum and dad”.
Yet playing this role raises complex questions. Should you offer financial support to an adult child? If so, how should this be done – and how often? Is it wise to ask for repayment (like a normal bank) and what are the tax implications of giving money? Below, our Burnley financial planners offer some thoughts. We hope this content is useful to you. Please get in touch to discuss your own financial plan with us over a free, no-commitment consultation.
Consider starting early
The earlier you start setting money aside for a child (e.g. for a future mortgage deposit), the more time compound interest has to grow the portfolio. For instance, if you invested £50 per month on a child’s behalf over 10 years, then it might eventually be worth £7,719.68 assuming 5% average annual returns. Over 20 years, however, the amount may be closer to £20,294.23 (£8,294.23 comprising interest compared to 1,719.68 interest over 10 years).
Explore tax-efficient vehicles
Between ages 0-18, a parent or guardian can open a Junior ISA on a child’s behalf and commit up to £9,000 per year into the account. Any interest, capital gains or dividends generated within it will be tax-free. From age 18, control of the account will shift to your child. At which point, you could speak to them about gradually moving the money into a Lifetime ISA. Each tax year, up to £4,000 can be committed by your child and the government will add 25% (up to £1,000). Here, the benefit is that your child cannot access the money unless used for a deposit on a first home (or, for retirement). So, there is less chance of it getting wasted on a fancy car or lavish holiday!
Formalise an agreement with your child
Many parents gift money to their children without ever discussing whether it is a gift or a loan. Often, transactions are not recorded and neither are arrangements for repayment. Few set up an agreement about what would happen if the parent/child relationship breaks down. These can be difficult conversations, especially if your child feels entitled to money from you. However, a formal agreement can protect everyone in the long run. For instance, could a financial gift to your child eventually end up with an estranged partner or spouse?
Documenting gifts, keeping paperwork logged with a solicitor and preparing appropriate legal documents (e.g. arranging a pre-nuptial or post-nuptial agreement) can help protect you and your child. Preparing a Living Together Agreement can also help your child think through these issues ahead of time with a partner and bring everyone to a shared understanding.
Think about inheritance tax
Each UK resident is entitled to a £3,000 inheritance tax-free “annual exemption” for gifts. This means that you can give up to this amount to your child (or across your children) each year without it getting counted as part of your estate for inheritance tax (IHT) purposes after your death. Gifts which exceed this annual exemption may lead to a 40% IHT charge if you die within seven years of the gift and your estate is valued over £325,000. For this reason, it might help to discuss tax-efficient options with your financial adviser.
For instance, you could “combine” your annual exemption with that of your spouse for a total of £6,000 in gifts within a year. You might want to “spread out” gifts to children across multiple tax years, or place gifts within a specific trust structure. The latter does not eliminate the need to pay IHT (as is commonly believed), but it can help ensure that the funds are used for their intended purpose – i.e. a deposit on a child’s first home – if you are no longer around to oversee the process when the time comes.
Some parents will want their child to repay the gift (with or without interest). Here, be mindful of possible IHT liability in the background. If you loan £20,000 to a child, for instance, which is later repaid to you, then you may not want it to eventually end up back with your child (i.e. after your death) minus 40% due to IHT. Seek financial advice to make sure that any joint decisions with a child are tax-efficient for all parties involved.
Invitation
If you are interested in starting a conversation about your own financial plan or investments, then we’d love to hear from you. Please contact us to arrange a free, no-commitment consultation with a member of our team here at Elmfield Financial Planning in Padiham, Burnley, Lancashire.
Reach us via:
T: 01282 772938
E: info@elmfieldfp.co.uk
