A report released last month by Openwork shows that nearly a third of parents worry they lack the financial understanding to run the Bank of Mum and Dad properly.
The UK-wide survey found that 32% of parents would like to receive advice before giving their children money.
The Bank of Mum and Dad is currently the UK’s sixth-biggest mortgage lender according to the London School of Economics (LSE), lending or gifting over £6 billion in 2019.
If you’re thinking of lending or gifting money to your children this year, you might wonder whether you need advice.
Here’s why we think you do, and how we can help you.
Three reasons to speak to us before opening the Bank of Mum and Dad
The average gift or loan from the Bank of Mum and Dad currently stands at £24,100, rising to £31,000 in London. You’ll likely be handing that money over without financial qualifications and without seeking advice.
According to a Legal and General report back in 2018, 77% of Bank of Mum and Dad lenders took no advice. But might that be about to change?
Here are three reasons to come to us for advice before you lend or gift money to your children.
1. We can help decide if you can afford it
The Money Pages recently reported that ‘around 40%’ of parents who helped a child onto the property ladder saw their living standards detrimentally affected.
According to This Is Money, the strain is ‘most likely to be felt by those between 55 to 64’.
The most important question to ask yourself is whether you can afford to lend or gift your children money. We can help you answer that question.
There are several ways you might find the money:
- Cash in investments – You might have ISAs, bonds, or regular savings you can use to raise capital. We can help you think about the potential charges and the impact of Income Tax or Capital Gains Tax (CGT).
- Use your pension – If you are over 55, you might consider taking a lump sum from your pension. But remember that your pension is designed to provide you with an income for the rest of your life. You might also trigger the Money Purchase Annual Allowance (MPAA), limiting the amount you can invest in the future. Speak to us now and we can help you work through the implications of taking money from your pension.
- Use your property – whether through remortgaging, Equity Release, or downsizing, you might use your property to raise the funds you need. But don’t take these options lightly. Your home may be repossessed if you do not keep up repayments on a mortgage or other loans secured on it and Equity Release will reduce the value of your estate and possibly affect your eligibility for means-tested benefits.
Although your instinct will be to give your child the financial help they need, it’s important to ensure you can maintain your standard of living after the loan or gift is made.
Your financial plan will include emergency funds and contingencies for gifting money in later life.
But if you want to open the Bank of Mum and Dad now, we can help you find the most tax-efficient ways to do it, and ensure your standard of living isn’t affected.
2. We know the right questions to ask
The Bank of Mum and Dad rarely behaves like a real bank. You might fail to ask fundamental questions such as:
- What is the repayment schedule?
- What interest rate is payable?
- What happens if your child’s circumstances change in the future?
And the most fundamental question of all:
- Is the money a gift or a loan?
The distinction is clear, but it isn’t always an easy conversation to have and the question can go unanswered.
Supply a gift and you won’t be asking for the money back. Repayment schedules and interest rates become irrelevant. Give your children a loan though, and they will need to return the payment.
Ask yourself these questions for your peace of mind, and then speak to us. We can help you think about the tax implications of each.
A loan remains part of your estate for Inheritance Tax (IHT) purposes. If made interest-free, HMRC could treat it as a gift.
The ‘seven-year rule’ means that if you die within seven years of making a gift (or in some cases, an interest-free loan) it could be liable for a 40% IHT charge. You might consider a series of small gifts, thereby staying within the £3,000 annual exemption.
3. We understand the importance of legal advice
A bank loan comes with a formal contract, and Terms and Conditions. A Bank of Mum and Dad loan should too. It’s important that all parties understand the nature of the gift or loan, and what rights the lender and borrower have.
Ask yourself:
- Do you want to stipulate how the money is used?
- Will you have any rights to the property?
- What happens if the property value goes up?
- Do you want a say in what happens to it in the future?
- What happens if you or your partner die?
These are important questions and the answers might not be straightforward.
Paying for legal advice at the start of the process forces you to think about the answers to questions you might not have thought to ask.
It could save you a considerable sum in legal fees if something goes wrong later.
This can be a complicated area so speak to us if you’re unsure. We can help you decide if a loan or a gift is right for you and point you in the direction of trusted professionals if you need further help.
Get in touch
If you would like to discuss any concerns you have about opening the Bank of Mum and Dad, get in touch. Please email hello@fingerprintfp.co.uk or call 03452 100 100.
Please note
A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits.
Investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
Your home may be repossessed if you do not keep up repayments on a mortgage or other loans secured on it. Equity Release will reduce the value of your estate and can affect your eligibility for means-tested benefits.
