Nowadays, the only way many young people can afford a home of their own is by turning to the Bank of Mum and Dad for some additional financial help. The challenge facing parents prepared to lend or gift money to their children is to decide quite how best to do so.
Although it’s understandable that parents want to help their offspring, it’s important that they think about the long-term implications of giving money away, and don’t compromise their own financial security. Taking financial advice will help them consider their options.
A gift or a loan
Some parents give their children money to help them buy a property, others prefer to make them a loan. With a loan, it’s worth drawing up a contract that stipulates what the repayment terms are to be. This will help prevent future arguments as to whether the money was a loan or a gift, and means the parents know when their cash should be returned. If a parent loans their child money and the child pays interest to the parent, then this is treated as income for tax purposes.
Taking tax into account
A gift of money may have Inheritance Tax implications. Whilst a gift of up to £3,000 in a tax year is exempt from Inheritance Tax, (as is a gift of £5,000 made when a child marries), giving more than that could leave an IHT liability if the donor dies within seven years.
Taking advice before giving or loaning a child money will help ensure that the tax implications of doing so are fully explored.