With property prices out of sync with wages, high rents and living costs rising, it comes as little surprise that first-time buyers are finding it hard to afford the deposit for a home. Unsurprisingly, many find they need to turn to the Bank of Mum and Dad for some additional financial help. The challenge facing parents wishing to lend or gift money to their children is to decide quite how best to do this.
Firstly, it’s really important that parents don’t compromise their own financial security; they need to think about the long-term implications of giving their wealth away. Taking financial advice will help them consider their options.
LOANING THE MONEY
It might suit some families better to loan rather than give their children money to help them buy a home. Although it may seem bureaucratic to do so, it is worth drawing up a contract that stipulates what the repayment terms are to be. Not only does this prevent future arguments as to whether the money was a loan or a gift, it also means that the parents know when they can expect to get their cash returned. If a parent loans their child money, and the child pays interest to the parent, then this is taxable.
A parent can gift any amount of money to a child without it giving rise to an immediate liability to tax. However, you may need to consider the Inheritance Tax (IHT) implications of doing so. Gifting a child more than £3,000 in a tax year means that the money will be classed as a ‘potentially exempt transfer’ and if the donor dies within seven years, the money will be considered to be part of their estate for IHT purposes, which may have an impact if their estate is valued at more than £325,000, and is not all passing to a surviving spouse. The normal IHT rate of 40% tapers down to 8% during the seven-year period.
A gift of up to £3,000 a year is exempt from IHT, as is a gift of £5,000 made when a child marries. Parents can also make regular gifts out of income provided that certain criteria are met, and the amount given away doesn’t affect the parents’ standard of living.
Seeking expert advice from a professional independent financial adviser can help ensure you’re informed about all the options available and make the right decisions for your own personal circumstances.