With soaring house prices and job insecurity meaning many younger generations are struggling financially, you may find yourself giving them a helping hand. While it may be something you’re keen to do, there can be concerns there too.
Research from Charter Savings Bank found one in four adults have borrowed money from loved ones in the past year. The total amount being borrowed over the year adds up to £1,093 on average. It’s a sum that often ends up being a gift too; just 54% of those who borrow cash say they always pay it back.
It’s not just small amounts that are being handed out either. Over a quarter of first-time buyers funded their home ownership aspirations with financial support in 2018, according to a report by Legal and General. The average contribution from the Bank of Mum and Dad stood at £18,000.
It’s natural to want to support loved ones if they’re struggling financially and you have the means to do so. However, you may have worries about your own financial security and the impact your money is having. Taking some time to think through these considerations before handing over the cash can help put your mind at rest.
1. Is it a loan or a gift?
The research indicates that while money may be given with the intention of it being paid back, this isn’t always the case. It’s important to be clear about expectations if it’s being given with the understanding that you will receive it back. It can ensure everyone is on the same page and reduce the chance of miscommunication occurring.
Should you decide the money is being given as a loan, talk to your loved one about when and how you’ll be repaid. If you’re loaning or gifting larger sums, such as a house deposit, it’s advisable that you put the terms in writing. You may want to speak to a legal professional too.
2. Will the money improve the financial security of your loved one?
Your generosity is probably linked to wanting to help your family members achieve financial security. As a result, you may be keen to know how the money you’ve contributed will be used. It’s a process that can help you understand how it could improve their financial security in the short and long term.
It could lead to you deciding that other routes are better. If, for example, you often find that your loved one needs help with day-to-day living costs, steps to reduce outgoings may help. A mortgage, in many cases, can be cheaper than rent for an equivalent property. Would loaning or gifting a single one-off lump sum to act as a deposit better secure their financial future?
3. How will it affect your financial security?
On top of your loved one’s financial security, you should also look at how the decision to loan or gift money will impact yours. Small gifts taken out of your income are easier to quantify, but if you plan to regularly contribute to costs or take out a larger sum, it can be difficult to calculate. This is an area that cashflow planning, as part of the financial planning process, can help with.
Cashflow planning gives a visual representation of your wealth and how it may change over time. With the ability to see how your wealth will be affected based on different decisions, cashflow planning can highlight the path that best suits your goals and assets. If you’re worried about how supporting loved ones could affect your future wealth, it can give you the confidence to proceed.
4. Will it affect Inheritance Tax liability?
When gifting or loaning money, it may be worthwhile considering your estate’s potential Inheritance Tax (IHT) liability. If the value of your entire estate, which includes all assets, is greater than the Nil-Rate Band, IHT may be due. Some gifts that are given within seven years of death are also considered part of your estate for IHT purposes.
This is likely to only be a consideration if you’re giving large sums away. Each year you can gift £3,000 and give £250 to individuals which are considered immediately outside of your estate for IHT purposes. Gifting some of your wealth now can be used as an effective way to reduce potential IHT liability. As a result, it’s an area to think about when deciding if your loved ones will repay the money.
If you want to better understand how you can financially support your loved ones, please contact us. We’re able to demonstrate how your decisions may impact your financial security and the best way to support those you care about.
Please note: The Financial Conduct Authority does not regulate Inheritance Tax Planning. Levels of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor.