by Richard Johnston
Chartered Financial Planner
As loving parents, we want nothing more than to help our children when the time comes for them to ‘fly the coop’. Whether they’re off to college, into a first job, or getting a first roof over their heads, a few extra pounds never goes amiss.
This is the time when we may open our doors (and our wallets) as the Bank of Mum and Dad – or Bomad if you like acronyms.
And don’t worry, there are many of us doing it! A new study* by the London School of Economics (LSE) says that the collective mums and dads across the UK now make up the sixth-biggest mortgage lender in the country, handing out a massive £6bn in loans or gifts last year.
Savills the estate agent** adds that two-fifths of mortgaged first-time buyers had been to see Bomad in 2019.
Society is also changing, and now the Bank of Grandad and Grandma is getting in on the act because they’re in a better position than ever financially to chip in to help.
However, if all of this sounds extremely generous and kind-hearted, it still needs careful planning in order to avoid unexpected tax bills.
Take gifts of money, for example
Each year you can give a child a gift, using your annual exemption of up to £3,000 free of tax. If you’re still working, another alternative is to give them regular sums, which would normally not be taxed as you have already paid tax on your salary. Again, however, there are conditions, and we can steer you right on the small print.
Another concern that crops up from time to time is on a very human level. You may have worries about the stability of your child’s marriage. This makes many parents wary of helping with a house purchase, if they fear that the marriage does not rest on a solid foundation.
They worry that, in the event of a divorce, a large portion of their child’s inheritance could be lost to a former spouse. Again, we can advise on sound generational planning that would reduce this risk.
As a minor aside, the same principle applies to life insurance pay-outs. There are times when it pays to do a little ‘fibbing’. Family Income Benefit insurance – ‘FIB’ for short – does not pay out a single large lump sum to your beneficiaries or children, but rather a regular monthly amount for an agreed term. With this gradual drip-feed arrangement, there is nothing to be lost in the event of a marriage break-up.
One other option is that you can enter into an arrangement to act as guarantor for your child’s mortgage.
Robert Duncan, Head of Financial Services at DJ Alexander explains: “This enables a joint mortgage or sole proprietor set-up – so the parents are also on the mortgage, but the child owns the property outright. This means that the Additional Dwelling Supplement (the 4% additional Land and Buildings Transaction Tax) is avoided.”
Setting up a trust is another option. Trusts aren’t as complicated or costly as you may imagine, and they enable you to retain an element of control over your money while still gifting it to loved ones.
Of course we can help you incorporate gifting to children into your financial plan. Contact us for a no obligation chat.
This article does not constitute financial advice, and should not form the basis for financial decisions, which should be taken only in consultation with a qualified financial adviser. The value of investments can fall as well as rise, and you may end up with less than you invested.
*quoted in LSE report ‘The Bank of Mum and Dad: How it really works’ done for the Family Building Society, 2019, p5
**Savills: ‘First Time Buyer funding and the Bank of Mum and Dad’ July 2020
***Openwork: ‘The Bank of Mum and Dad needs advice’