19 Oct A helping hand – financial assistance for your children
When meeting with our clients, one frequently recurring ‘money value’ or high level policy statement is:
“We want to provide our children with a hand up not a handout”
Clearly this will mean different things to different people but in general terms it is a statement of intent to offer some form of financial assistance to their children but to ensure that they still have to stand on their own two feet.
Offspring are increasingly in need of help from their parents when they are purchasing either their first property or trying to buy a bigger property so clients frequently ask us, in the context of their plan, “Can we help our children to buy a property?”.
Having a sound financial plan in place should provide a good indication of whether it is possible to provide such assistance and, if so, how much can be provided without causing a detrimental effect on your own future.
Assuming that it is possible to help, this inevitably leads to many more questions:
- How should this assistance be provided?
- What is the best way to ensure that any help does not lead to adverse tax consequences for either ourselves or our children?
- What happens if my child’s relationship with their current partner comes to an end?
- How do we ensure that all our children are treated fairly?
There are several options available and each has its merits. The most appropriate will clearly depend on personal circumstances but the following are the most common:
- You make an outright cash gift. Funds are given in order to provide either a significant deposit or enough to buy the property outright.
- You partially purchase the property with your child or children and therefore become co-owners.
- You provide an unsecured loan to reduce the amount of mortgage required.
- You become a guarantor for a mortgage in your child’s name.
- You effectively become the mortgage lender for your child.
Which option you choose depends on your own circumstances but it’s also important to consider your child’s attitude to their finances (are they a spender or a saver?), their employment status, their earnings and the status and likely future of their current relationship.
The option to become the mortgage lender can meet the value statement I mentioned earlier by providing financial assistance but not making it so easy that any help becomes a disincentive to work hard and achieve.
In conjunction with your financial planner you can decide how much you can afford to provide for the help they need to purchase a property. They then choose a property they wish to purchase and provide an element (depending on what they can afford) of the funding, similar to a deposit if they were seeking a mortgage. You then lend them the amount needed to complete the purchase, while taking first charge on the property and charging a reasonable rate of interest on the loan (this could be linked to the Bank of England base rate but should also reflect the return that you require on the capital in order to meet your own objectives). You can set the repayment date for the loan but this can be flexible, e.g. when they sell the property.
Some advantages of this option are:
- A larger loan can be made than could be obtained via a commercial mortgage lender.
- Interest payments for the loan still have to be made, which is good discipline for the future.
- When the property is sold they benefit from all the equity and your loan can be repaid.
- There is no increase in the value of your own estate, as you have not increased the value of your assets and you do not benefit from any growth in the property’s value.
- You can waive the interest if necessary and you can afford to do so and/or you can write off part or all of the loan as future gifts (although this has inheritance tax implications).
- The funds which you lent are protected from hostile creditors (such as from a relationship breakdown) and you have first charge on the property.
Careful consideration of your own and your children’s personal and financial circumstances is fundamental before any action is taken, particularly around estate planning, and legal advice should be sought.
There are some disadvantages of this method and it may not be appropriate for every situation but it does the job of providing a helping hand rather than a hand-out.