There was a recent article on the BBC website, which shows that the bank of Mum of Dad is one of the UK’s top ten mortgage lenders (you can read the article here:
https://www.bbc.co.uk/news/business-49477404) based on information gained by Legal & General.
In 2018, The Bank of Mum and Dad, lent/gave/gifted £6.3 billion to their children, averaging £24,100 per child. This is coming from pensions, and/or savings and the article explains that this is lowering the standard of living for parents in their retirement – but that is not the only issue!
In 2017, the last year for formal statistics, 42% of marriages ended in divorce with the average marriage lasting approximately 12 years. This does not take into account the number of un-married couples end their relationship and have to carve up their assets. This means that a well-intentioned leg up from parents can be lost in a divorce settlement or split as the house is either sold or one partner buys the other one out.
There are ways to make sure the money stays in the family, so it can be used to help your child re-start their life, but sometimes they can be awkward to raise as a discussion point, never mind possible unintended tax complications they can cause. There are some standard options that we see people use. Such as:
• Pre-Nuptial Agreements
• Parents owning a percentage of the house
• Setting up loans between parents and children
Pre-nuptial agreements are becoming more common, but they are not legally binding and raising them can be awkward, especially if your child is setting up home with the one they love and intend to be with for life!
Owning a percentage of the home, can also cause issues, as this now classes as an investment and part of the parents estate. A large percentage increase in the value of the property can cause potential Capital Gains tax liabilities when the children move and the property sold. Mortgage companies could be less inclined to lend due to the ownership structure and the property share is in Mum and Dad’s estate on death – so Inheritance Tax becomes an issue to consider.
The loan option also means that Inheritance Tax on Mum and Dad’s estate needs to be considered and who has the first charge over the property. Mum and Dad, or the mortgage company? If the kids lose the house through financial difficulties or divorce, the mortgage company will have first claim and there is no guarantee that this will leave enough equity to repay Mum and Dad.
However, passing the funds through a trust can be tax efficient, easy to negotiate and straight forward to set up.
The Bank of Mum and dad can make their gift to the trust instead of their son or daughter directly. For Inheritance Tax planning, it means the money is out of Mum and Dad’s estate starting the seven year clock to remove it completely (and by proportion from year 4 onwards). The trust then loans the money to son and daughter, taking a legal charge on their estate (not just the property), on a basis of no interest being charged and no monthly payments being required. Instead the loan is repayable on demand, as decided by the trustees. This can include divorce, money troubles etc.
If divorce proceedings begin, the loan can be reclaimed, and once the divorce is settled, the funds sent back to son or daughter so they can start again. The parents can even miss out the children completely and use the funds to support their grandchildren (as long as the right clauses are written in the trust!).
So before jumping in to help out your little darlings, perhaps you need to consider if you need to use protection and which is best for you?