Parents and grandparents are increasingly providing financial support to help the next generation find their feet. While you may want to offer a helping hand by financially supporting children, it’s important that it’s a decision you’ve carefully considered to ensure it’s right for you and your loved ones.
Figures show the extent that parents and grandparents are lending a helping in when it comes to getting on the property ladder. According to Legal and General, parents on average are contributing £24,100 to help loved ones become homeowners. In total, the Bank of Mum and Dad was expected to lend or gift up to £6.3 billion in 2019.
Of course, it’s not just parents that are lending a helping hand, many grandparents are also dipping into their savings to support the next generation. Financially supporting children goes beyond the property market too, perhaps you want to help them further their education or career prospects, pay school fees for grandchildren or simply help with day-to-day costs.
It’s natural to want to financially support children or grandchildren if they’re struggling. However, it’s important to make sure you’re all on the same page and understand the potential long-term impact first.
If you’re thinking about using savings or other assets to lend a helping hand, it’s worth answering these five questions first.
1. Would the support be a gift or loan?
This is the first thing you need to be clear about, ensuring that both you and your child or grandchild are on the same page.
If the money is a loan, you should be clear about when you expect it to be repaid. Taking legal advice is something that’s often overlooked when lending money to family but when it’s a significant amount, such as a house deposit, it’s often advisable. A legal professional can help you set out how the money should be repaid and provide advice on other areas, for example, what steps you should take if your child will be buying a house with a partner.
If you’re in a position to gift financial support, you may still need to have this in writing. Mortgage providers, for example, may ask for proof of funds. There are other considerations with gifting too, including the tax implications.
2. If it’s a gift, would the amount exceed the gifting allowance?
If your estate is likely to be liable for Inheritance Tax when you pass away, you should keep the gifting allowance in mind too. This is the amount you can gift loved ones and it is considered immediately outside of your estate for Inheritance Tax purposes. Gifts that aren’t immediately exempt, may be included as part of your estate for up to seven years, potentially increasing tax liability.
Each tax year, your £3,000 gifting allowance resets. This can be carried forward for one year. So, if you and your partner didn’t make use of the gifting allowance in the previous tax year, you could potentially gift up to £12,000 in total without having to worry about Inheritance Tax.
Other gifts are considered immediately outside of your estate too. This includes gifts made from your income, this could include regular gifts that help with day-to-day living costs, and those that help pay the living costs of a child under 18, such as school fees.
3. What is the money to be used for?
While you may not have control of how children or grandchildren spend the money once you hand it to them, you should have a conversation about what it’s for.
Miscommunication can lead to tensions and potential conflicts, it’s best to understand how they intend to use it and let your wishes be known if you have a preference for how it’s used too. If you gifted a lump sum with the plan to help reduce mortgage debt, for instance, you may not be happy to find out they’ve used it for something different entirely.
It’s also an opportunity to see if there’s a better way to provide support by understanding the challenges they’re facing. For example, you may be helping with day-to-day costs on a regular basis but find that a lump sum to pay off debt, buy a house or create a safety net is more effective in the long term.
4. Where will the money come from?
If you’ve decided to go ahead with financially supporting children or grandchildren, you should spend some time thinking about where the money will come from.
There are two key things to consider here, tax and allowances. You could access savings and investments held in an ISA tax-free, for instance, but you may not be able to replace the amount when you consider the annual ISA allowance of £20,000. In contrast, selling a portion of your investment portfolio to provide cash could result in a tax liability if you’ve already made use of your Capital Gains allowance.
To effectively pass on wealth, you should understand your assets and how they fit into your wider financial plan. Please contact us if you have any questions.
5. Will the support offered affect your lifestyle or plans?
It’s natural to want to help children or grandchildren secure their financial future, but yours is important too.
Taking a lump sum out of your assets, whether a pension or investments, can have a long-term impact on your goals. You should ensure you understand the implications of doing so and how it could potentially affect your lifestyle.
Many clients find they’re in a position to support loved ones without it having an impact on their own goals. However, taking the time to understand the financial implications means you can proceed with confidence. If this is something you’d like to discuss with one of our financial planners, please get in touch.
The value of tax benefits and allowances depend on your individual circumstances. Tax rules can change. The Financial Conduct Authority does not regulate Tax Advice.