How to give your kids cash without breaking the bank of mum and dad
The generosity of parents and grandparents knows no bounds and as the cost of living spirals, youngsters are leaning on them more than ever. Last year, the older generation gave almost £9 bn to offspring and according to Legal and General, less than a quarter want to be reimbursed.
Karen Barrett, Chief Executive of Unbiased.co.uk says it’s important to think about how your own finances will be affected before you give money to younger relatives. “More and more young people are going to the bank of mum and dad, especially when it comes to helping them onto the property ladder, but before you offer financial support, think about how it will impact your own finances in years to come - for example, what will you do if you need long term care? Or cannot work for some reason? It is always best to consider every eventuality.”
Before you give any money away, Karen urges you to consider the following:
Gift or loan?
If helping your children could mean financial hardship for yourself further down the line, a loan might be more suitable. If you go down this route, make sure you draw up a contract. It might be difficult to broach, but it will avoid upset down the line. If you want to gift the money, you need to keep the following taxes in mind -
Inheritance tax - you can give up to £3,000 away in any tax year without penalty. If it’s for a wedding, you can up that to £5,000 (grandparents can give £2,500 for a wedding). Anything over that amount and it will be liable for inheritance tax if you die within seven years of the gift being made.
Capital gains tax - any transfer or gift is treated like a sale, so if it is worth more than you paid for it, you could face a CGT bill of up to 28% on the profit. The annual CGT exemption is going down too. For 2023/24 you can make a profit of £6,000 without paying CGT tax, but from April 6th 2024 the allowance falls to £3,000.
Transferring a property
If you want to transfer your property to your children or grandchildren and will remain living in it, you’ll have to pay them market rent, or else it will be classed as a ‘gift with reservation benefit’ and will remain as part of your estate.
Some assets, such as a business or a portfolio of AIM (Alternative Investment Market) shares could be eligible for property relief meaning that you can pass them on free of inheritance tax or at a reduced rate.
Raiding your pension pot
If you take a one-off withdrawal from your pension pot to give cash to your children, you might have to pay income tax. You are allowed to take 25% of your pension pot tax free, but anything over that and the rest is taxed as income at the top rate of tax you pay, which could be up to 45%.
Start early and invest in your child’s pension when they are born and they could retire as a millionaire if you make reasonable payments.
Releasing equity from your home
A recent study found that one in five over 50s are considering using the equity in their home to help younger relatives. With equity release, you take out a lifetime mortgage on your home and pay it back when you die or move into long-term care. Bear in mind that equity release mortgages are more expensive than conventional mortgages.
Be a guarantor for a younger person’s mortgage
You can agree to take on your child’s mortgage repayments if they fail to make them. This can involve using your own home as collateral and enables your child to buy a home with a smaller deposit.
Make sure your money doesn’t end up outside the family
How do you make sure your gift remains in your family? For example, you might give your child a deposit for their first home, but they then get divorced and half of that money goes to their spouse. The best way to do this is to take measures before you gift. A legal document such as a deed of trust, can ensure that the money stays in your immediate family whatever happens. It’s always best to speak to a solicitor in these instances.
Make sure you can afford it
You might think that giving assets or a gift is within your means right now, but have you thought about how it might affect your finances in the future? Work out the impact of a gift with cashflow modelling. You supply information on all your assets, income, etc and you get a guide as to how your finances will look in the future.
If you are considering gifting money or assets to a younger person, always speak to a financial advisor first - use Unbiased to find a trusted advisor in your area.