06/09/18Six things the Bank of Mum and Dad need to know
Despite more millennials relying on the Bank of Mum and Dad, a quarter are worried about not having the right financial knowledge to make the right decisions for them and their children.
As younger generations face financial pressures, more and more are turning to the Bank of Mum and Dad (or even grandparents) to take a step towards financial security. Helping the next generation get a foot on the property ladder, pay off debt, or invest in education is appealing for many parents and grandparents but it’s also fraught with uncertainty and risk.
The Bank of Mum and Dad is playing an increasingly important role in the lives of the millennial generation. Research from Legal & General found that over a quarter of housing transactions are dependent on financial parental support with the total lent during 2018 expected to reach almost £6 billion. On average, parents are contributing £18,000 to a housing deposit, a sum that can be daunting to simply handover if you have no prior financial knowledge or planning.
Despite a reliance on the Bank of Mum and Dad for many millennials, some parents still feel like they’re lacking in the financial knowledge and expertise needed to avoid making potentially costly mistakes. A nationwide survey conducted by Key Advice revealed a desire to learn more:
- 76% of parents aged 55 and over find gifting rules complicated
- 24% worry about not having the financial knowledge to make the right decisions
- 40% want better support for parents that are financially helping children
- 78% would welcome tax incentives for gifting to children for major life events
- 26% want to seek professional advice on how to make financial gifts
- 46% want to seek legal advice but are worried about expenses
It’s not just the parents that are worried either. Almost half (46%) of 18-40-year olds that participated in the survey said they were concerned their parents didn’t have the right level of knowledge or support when acting as the Bank of Mum and Dad.
It’s not surprising that taking on the role of financier is challenging for both parents and children. It can add a new dynamic to relationships and be confusing to unravel the most tax-efficient way of handing the money over.
Six things to know before you act as Bank of Mum and Dad
If you’ve decided to offer financial support, whether the cash will be used to secure a home for your children or clear debt, so they can start the next chapter of their lives, make sure you understand these six tips first:
1. Make sure you can afford it
The decision whether to open the Bank of Mum and Dad is often ruled by the head and the heart. With the heart wanting to help but the head nervous about the long-term financial impact on your own plans.
Understanding how passing a potentially large sum of money to your children will affect your financial future is vital before you make any final decisions. Engaging with a financial planner can show you the long-term impact of making a gift or loan and will confirm the extent of which it will affect your ability to achieve your own goals and aspirations. It may also give your head the confidence to follow your heart.
2. Communication is key
The first thing to make very clear is whether this is a gift or a loan. You’ll also need to set the parameters, for example what the money will be used for, who it will be used by, and whether it’s being made to your child or with their partner. As with any agreement, it’s important for both parties to understand what is expected. If, for example, you’re providing the cash needed for a house deposit that they will share with a partner, will they take steps to protect their money should the relationship end?
3. Use a contract for a loan
If you’re making a loan, having a contract in place to outline repayment terms can be useful. We’re sure you won’t be chasing your children or grandchildren for payments like a bank would, but it’s a good idea to have expectations outlined and recognise that circumstances can change. If the money is being offered on a gift basis, you may still want to outline that you have no right to get the money back. Making the gift or loan more official can help give you both peace of mind.
4. Get the full use out of your IHT annual exemptions
While over three-quarters of parents said they find the gifting rules complicated, the basics are simple. Each year you can gift up to £3,000 which will immediately be outside of your estate for IHT purposes. However, should you gift above this yearly allowance, which is likely if you’re helping your children with their house deposit, and die within the next seven years, the amount above the £3,000 threshold may be liable for Inheritance Tax (IHT). The amount of IHT due will depend on the total amount, your other taxable assets and how long ago it was gifted.
5. You should have a plan for where the money will come from
Once you’ve agreed to gift or lend a sum of money to your children, you’ll need to think about where that money will come from. This will vary depending on what assets you hold. Some parents may find it’s more effective to take money from an ISA, while for others using retirement savings is more efficient. This is an area that a financial planner can help you with.
6. Financial and legal advice doesn’t have to be costly
The survey found that over a quarter of parents wanted to seek financial advice before they gave their child a monetary gift and 46% wanted legal advice. However, the associated costs were putting some off. Seeking specialist expertise doesn’t have to be expensive and it can result in lower overall costs in the long run as well as giving you peace of mind.
When it comes to acting as Bank of Mum and Dad, it’s common for your heart to say you want to help but your head to be unsure and not able to give you the confidence needed to do that. Financial planning will show you how taking a lump sum of money out of your asset base and handing it over to your children or grandchildren will affect your own financial future.
For help planning your finances and projecting short, medium, and long-term income when supporting loved ones, contact us today.