If you are seriously considering helping your children on to the property ladder or providing a loan for a significant life event, it is important to consider the legal and tax implications as a ‘lender’, to make sure your generosity is delivered in the most tax-efficient way for all parties involved.

A report released in the summer by Legal and General demonstrates how common it is for the ‘Bank of Mum and Dad’ to step in and support family members in their first house purchase, for example. 47% of all home purchases were by individuals under the age of 55, and the number of family ‘lenders’ has increased by 52% in the last 7 years, with an average loan of around £25,600. This is a significant proportion of house sales happening as a result of family members help, but potentially many of these transactions have not been thought through from a tax and legal perspective.

Supporting your children on the property ladder financially can often result in reassessing your own financial circumstances, and the L&G report shows that while half of parents and grandparents used cash savings to help their loved ones, 12% downsized to release equity, and 16% took a loan, remortgaged, or took equity release to free up some cash to help out.

Without proper advice or guidance, there is a growing number of parents and grandparents who have been left with a shortfall in retirement or a reduced standard of living due to helping out younger family members financially, which is very worrying and something we want to help rectify.

**Gift or a loan?**

Many parents and grandparents talk about a loan but do not expect it to be paid back.
It is an advantage to consider the cash giveaway as a gift versus a loan, as you can utilize your inheritance tax exemptions by gifting in your lifetime without a potential inheritance tax liability if you outlive the loan by seven years after the cash gift is made.

It is also a tax advantage for your children to receive the cash as a gift versus a loan if it is used towards the deposit of their first home. Any gain made in their home when they sell up and up size, for example, will be free from capital gains tax via Private Property Residence (PPR) tax relief. .

Compare this to a parent or grandparent volunteering to buy a portion of the property alongside their children, so they are named on the property deeds. As this likely won’t be the parent or grandparent’s main home, any capital gains on their share of the property if/when sold will be liable for capital gains tax.

The risks of gifting cash to your children

Many parents and grandparents, however, may be reluctant to provide an outright cash gift, as many fear that it may be lost in their child’s divorce or messy relationships, and it is reported that 1 in 3 parents actually fear this happening with their children’s future partners.

In this case, the idea of a loan or sharing equity in the property may be more appealing than gifting the cash, but there are other options to consider.

For example, the child receiving the cash gift could have a pre-nup or post-nup or the cash gift could be made via a trust structure, such as a new lifetime trust or a declaration trust to protect the gift and make sure it passes to the intended party.

Is a trust structure right for you?

Setting up a trust is a useful tool to use in situations like these to protect your wealth and ensure your wealth is passed on in the way you intended.

A lifetime trust for example, could mean gifting a child or children, the beneficiaries of the trust, up to £325,000 without incurring any inheritance tax charge, or £650,000 if the trust is set up by a married couple. These figures relate to your inheritance tax exemptions, where every individual has up to £325,000 inheritance tax-free assets in their lifetime as part of their overall estate.

With this set-up, your cash injection is protected via this trust structure and goes to your children only as intended.

The risks however, are that if one of the child beneficiaries does get a divorce, the divorce court may look through the trust, and your child’s assets will be split 50/50 anyway with the divorcing partner. In this case, a pre-nup or post-nup may be a better option.

Pre-nups and Post-nups - are they viable options?

Protecting your assets when trying to help family members brings complexity and risk to the situation when partners are involved, some of which relate to what ifs and fears of what will happen in the future. In this case, if a parent would like to make a cash gift to a child, a pre-nup is a good idea if the child is planning to get married, or a post-nup if they are indeed already married at the time of gifting the cash.

In both situations, proper legal advice must be sought to keep all parties involved protected, including the child beneficiary as well as their partner, neither of which should be in a situation of real need as a result of excising the pre or post-nup.

A pre-nup must be made at least 28 days before the wedding from a legal perspective, so there is no question of duress.

It may be a difficult conversation to have as a parent to a child, so it is better to offer financial help and suggest a pre-nup at the same time. The pre-nup and post-nup are formal legal documents, led by your lawyers, that also apply to all siblings, if relevant. Setting out the terms in this way will help shape the conversation, which is a formal legal process versus having to speak of any worries or concerns about children’s lifestyles or partner choices.

How can we help?

So often parents and grandparents, as well as their child beneficiaries, do not take proper advice and face financial issues down the line, as well as causing potential damage to personal relationships.

We can provide tailored tax advice to parents and grandparents on the structure of a gift or a loan to a loved one, and we work closely with legal contacts to ensure the end to end process runs smoothly. We understand that very often in these situations, time is of the essence if a child is looking to make a house purchase for example and timely advice is key.

We also work closely with financial planners so that cash flow modelling for parents and grandparents’ finances has been thought through ahead of any cash gifts made, and all scenarios have been considered to reduce the risk of hardship as a result of gifting.

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