“The Bank of Mum and Dad” – it’s not like the others

Whatever your view about banking on Mum and Dad, make sure you avoid a legal or tax sting.

Most parents try to prepare their children for the financial realities of life. Of course, those realities depend on birth, luck, or hard work. For prominent people, there may be decisions about how much to leave. Famously, Warren Buffett has pledged to give away 99% of his fortune and Nigella Lawson has commented that not having to earn money ruins people.

Many parents however want to help their children financially. A recent report found that two-thirds of first-time buyers receive financial help from parents – a figure that has doubled in five years.

For inheritance tax purposes, some gifts are exempt and a person does not have to survive 7 years, including gifts up to £3,000 in any one tax year, plus any unused balance of £3,000 from the previous tax year. You can give up to £250 each to any number of people (provided that they have not received the £3,000 above). On their wedding, you can also give £5,000 to each of your children (including adopted and step-children), or to their partner. If your grandchild is marrying, the figure is £2,500 and for anyone else, £1,000.

If you give away a larger sum, then there would usually be no immediate consequences but the 7 year clock would start ticking and if you were to die during those 7 years, then it would be deducted from the inheritance tax threshold on death.

Instead of capital sums, you could give away income. This is giving away the apples from the tree, rather than chopping off branches! However, the gift has to be unconditional, forming part of usual expenditure, made out of income and leaving sufficient income to maintain a normal standard of living.

If you make an unconditional gift of money to help with a property purchase, then consider who will be sharing it. If your child is going to own a defined percentage share with a friend or partner they should put a Declaration of Trust in place which records the beneficial shares of the parties and provide for agreement between them in relation to any mortgage borrowing. It is also important for both owners should have a Will.

If you help one child at a certain point but not another, it is possible to update a Will so that “credit” is given for amounts already given away in the deceased’s lifetime, achieving equality between all the branches of the family.

If you inherit from another person, it is possible to enter into a Deed of Variation, so that some or all of the benefit passes directly to new beneficiaries, without passing through your own estate for Inheritance Tax purposes. However, this is under consultation following the recent Budget.

Most importantly, avoid the “Bank of Mum and Dad” getting into crisis. Always ensure that your own needs are met, including retirement planning.