5 important things to consider when loaning or gifting money as the “Bank of Mum and Dad”
The so-called “Bank of Mum and Dad” or the “Bank of Grandpa and Grandma” has become one of the most popular ways for younger individuals to meet their financial goals.
Whether it’s going to university, travelling, or buying a first home, loans or gifts from parents or grandparents are commonplace in allowing the next generation to live their desired lifestyles.
In fact, according to figures published in MoneyAge, grandparents and parents gifted £2.1 billion to younger relatives between January 2020 and December 2022 alone.
If you have children and grandchildren you’re intending to support with a gift or loan from the Bank of Mum and Dad, there are a few key things to consider first.
1. Have an open conversation about using your money responsibly
It’s important to speak to your child or grandchild about the importance of using your money responsibly.
While you may be keen to support them in going to university or getting on the housing ladder, for example, it’s essential to have a frank and open discussion with them about how this choice will affect your own finances.
For example, they may not realise that you have to support your own retirement goals and lifestyle while factoring in rising inflation and potential later-life care costs.
This is why before committing to giving financial support, you should ensure you have established how much your child needs and how they intend to use it.
You may also benefit from speaking to a financial planner, who can help you work out the best place to draw the funds from.
2. Decide if the money is a gift or a loan
While it might seem like an irrelevant distinction, it’s crucial to establish whether you are gifting or loaning money to a child or grandchild.
Gifting money to loved ones can have several benefits:
- You see the joy your money brings
- Your loved ones can benefit from their inheritance when they need it most
- Reducing your wealth over time could mitigate your Inheritance Tax (IHT) bill.
However, remember that any gift you make could incur an IHT charge if you die within seven years of gifting. Another consideration is that you might need the money later on, for unexpected care costs or to achieve your own goals.
Alternatively, you could loan the money. This could give you peace of mind by allowing you to:
- Keep some control over the money
- Know that the sum will be repaid to you so you can achieve your own lifestyle goals
- Clarify expectations for both parties, such as the repayment schedule, interest, and what will happen if they can’t meet repayments.
Hammering out loan terms and conditions with close family members may feel a bit formal but could be crucial in avoiding any potentially damaging misunderstandings.
You may want to take legal advice and put a formal agreement in place.
3. Think about if you can afford to live without the money you’re gifting
High inflation, rising interest rates, and Ofgem’s lifting of the energy price cap meant most people found 2022 more expensive than they’d hoped. You may feel strongly that now is the time to step in and help your children and grandchildren achieve their financial goals.
But while gifting or lending loved ones money could be rewarding, have you considered the long-term impact on your own finances?
For example, you may have saved what seems like enough to support your own retirement lifestyle for decades to come, but have you factored in the eroding effects of inflation? And have you fully budgeted for unforeseen expenses such as care costs in later life?
This is why speaking to an expert about tools such as cashflow planning could be beneficial. 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.
4. Consider your Inheritance Tax options
The Inheritance Tax (IHT) annual exemption allows an individual to gift up to £3,000 a year with this amount immediately falling outside the value of your estate. This means, as a couple, you can gift up to £6,000 a year to your child or grandchild. And if you haven’t used the full exemption in the previous tax year, you can also carry forward the amount for one year, increasing the potential gift to £12,000 for a couple.
You should bear in mind that this exemption is the total amount you can gift in a single tax year and have it fall outside your estate. So, for example, if you and your spouse or civil partner gave £3,000 to one of your children and a further £3,000 to a grandchild, that would be both yours and your spouse or partner’s entire exemption used up for that tax year.
This could provide a useful lump sum for your child to get on the property ladder or cover another big-ticket purchase.
You can also gift assets above the £3,000 exemption. However, bear in mind that if you die within seven years of making the gift, the amount could count as part of your estate and may be taxed at the standard rate of IHT.
5. Support them financially without gifting money
While gifting or loaning money directly is perhaps the most common way for you to support a child or grandchild, there are various other ways you could consider doing so.
Pay into a Junior ISA (JISA)
A JISA is a tax-efficient individual savings account open to any UK resident under the age of 16. They can only be opened by a parent or guardian but, once set up, you can pay into it on the child’s behalf.
As of the 2022/23 tax year, the JISA subscription limit is £9,000, and this amount can be split across the two main types: a Cash JISA and Stocks and Shares JISA.
This could be perfect if you want to contribute towards your loved ones’ nest egg from a young age until they are 18.
A junior self-invested personal pension (SIPP) can be opened for anyone under the age of 18.
You can contribute up to £2,880 a year, with those contributions topped up by government tax relief to £3,600.
Paying this maximum amount on behalf of a child, from their birth until they reach age 18, will make a huge difference to the size of their pension pot at retirement, although they won’t usually be able to access funds until they reach the minimum pension age – currently 55, rising to 57 from 2028.
If you are uncomfortable about gifting large sums, you could sign on as a guarantor for your loved ones’ mortgage. This means you agree to take on their debts if they become unable to repay.
This could take the form of a joint mortgage, which could be helpful if your child or grandchild is buying as a single person, or a “family springboard mortgage”, where you place funds in a secure account for five years, and have them returned with interest if the mortgage holder (your child or grandchild) proves able to repay the debt.
Get in touch
If you’d like to find out more about organising your wealth for your family’s benefit, please do get in touch with us at Britannic Place.
Email email@example.com or call 01905 419890 to speak to us today.
This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
The Financial Conduct Authority does not regulate estate planning, tax planning or will writing.
The value of your 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.