August 28th, 2020

Everything you need to know if you’re planning to become the Bank of Mum and Dad

As house prices continue to rise, increasing numbers of young adults are needing financial assistance to afford their first home. So, in recent years, many young people have turned to their parents for help when the time has come for them to buy a place of their own.

Research has shown that parents give an average of £24,100 to help their children get on the property ladder, rising to £31,000 in London.

The Bank of Mum and Dad is predicted to collectively give £6.3 billion to help with the purchasing of homes in 2020. This would be enough to put them on the top 10 list of mortgage lenders in the UK.

If you have children and want to help them get onto the property ladder, here are a few things to consider.

Formalise your lending

One mistake many parents make is failing to formalise a loan they give to their children. In most cases, families do not keep any written records of their transactions. Many others don’t even discuss whether the money is a gift or a loan.

This isn’t surprising, as a lot of people can be uncomfortable talking about money, especially with family. However, failing to formalise your agreement can have profound consequences. Without a written agreement, a parent may be forced to take their child to court to get their money back.

A survey by the London School of Economics found that around 23% of people whose parents had helped them out financially had been loaned the money. If you are loaning the money, you should decide whether you want to organise a formal repayment plan or a more flexible one.

If you don’t formalise the agreement, you could run into problems further down the line. Helen Morrissey from insurer Royal London says: “Arguments over whether money needs to be repaid, or over what time period, have the potential to cause considerable harm to the parent/child relationship.

“It may seem very formal, but all parties should consider taking legal or financial advice and, if needs be, get something down in writing. Taking this approach can bring much needed clarity to the process and save both parties a lot of grief.”

Think about the tax implications of a gift

Bear in mind that while gifting money to your child is one way to help them onto the property ladder, there could be tax implications.

If your estate is subject to Inheritance Tax (IHT), your gift could incur a 40% Inheritance Tax charge if you die within three years of the money being gifted. If you die between three and six years after giving the gift, IHT is payable at a lower rate. If you survive for seven years after making the gift, it will no longer form part of your estate, meaning no IHT is due.

Consider a Living Together Agreement

If your child is living with a partner, it’s easy to worry that any financial aid you give won’t end up with them. Research shows that almost half of parents say their lack of trust in a child’s partner has affected their willingness to gift money.

For example, you may be concerned about what would happen if your child and their partner were to break up, and you have loaned/gifted them money to help with their purchase.

The Times recently reported a case where a couple spent £380,000 on legal fees following their son’s divorce as they did not want their former daughter-in-law to be awarded half of the £2 million home they had funded.

If you’re concerned that your gifts to a loved one might not end up with them, it can be a good idea to seek professional help to draw up a binding agreement.

A Living Together Agreement for your child and their partner could be one way of tackling this issue. This is simply a written record of who owns what in a shared household. It’s a good way to encourage your child and their partner to sit down and think about their day-to-day finances.

Alternatively, if your child and their partner want to marry, you could get them to set up a prenuptial agreement. This document sets out which of their assets will be divided if they divorce. Everything from debt to property to inheritance can be covered by this agreement, so you can put your mind at ease.

If your child and their spouse are already married, a postnuptial agreement is needed.

By organising a legal agreement, you can avoid the risk of having to settle the matter in court. Osbornes, a London-based firm of solicitors, says that cases of parents taking their children to court over property loans tripled between 2016 and 2019.

It’s important to remember that even if you win the dispute in court, you might still have to pay expensive legal fees. This can be avoided by thinking ahead and setting up a binding legal agreement with help from a solicitor.

Get advice from a professional

A study by the London School of Economics found that few families who financially support their children seek legal advice before loaning them money. Most did not make deeds of gifts or contracts for loans either.

The LSE study also found that 24% of parents surveyed were concerned about how a gift or loan would impact their finances.

These fears aren’t unfounded, as 20% of parents had to downsize their home to make a financial contribution to help their children get onto the property ladder, whilst 17% had to dip into their pension savings.

As a result, almost one in five parents have said they experience a lower standard of living as a result of helping their children out.

Seeking the help of a professional adviser can help you to formulate a financial plan that will ensure you don’t suffer financially because of your loan.

A professional adviser can also help tackle issues such as:

  • Avoiding tax implications when gifting money
  • The repayment arrangements of a loan
  • Whether you, as a donor, have a say in what happens to the property
  • What would happen if there were an unexpected death before the loan was repaid.

Get in touch

If you’re considering helping a loved one to get into the housing market, our financial advisers are happy to help. Email or click here to request a call back from one of our advisers.

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