To Gift or Not to Gift?…
Getting on The Ladder…
When it comes to buying their first property, it’s probably never been harder for younger people. Since the credit crunch, mortgage lenders have become stricter, deposits need to be MASSIVE and earnings for younger people (even those with degrees) are relatively low. It’s hard for them!
Lending from families, particularly Mum & Dad is often essential. In fact, according to Legal & General, an estimated £6.26 billion was given by parents to help fund their children’s property purchases in 2019, with the average gift being £24,100.
Gift or Loan?...
But do you GIFT the money or do you LEND the money? Well, as with most things in life, there’s pros and cons to both options.
If you gift the money and, sadly, die within 7 years, there could be a knock on the door from the taxman looking for some inheritance tax. That’s not good, especially if the person you’ve made the gift to has used the money to buy a property. They might be a bit strapped for cash if the money’s tied up in their house!
Another problem with gifting is that you might not be too keen on how that gift may be used. It might be that there’s someone who’s married in to your family that you don’t particularly like or trust but you’ve no control over the gift once you’ve made it. And what happens if they divorce? Where does your gift end up then?
An alternative might be to lend the money. I know that might sound a bit stingy but, if you make a gift and then find you’re a bit short of money yourself (perhaps you need to cover expensive care fees), you may regret having made the gift in the first place. That’s not good.
By lending the money, you have the opportunity to get it back. Provided everyone goes in to the arrangement with their eyes open, it could be a good solution.
You might even want to charge interest and setting up something formal, so you maintain some control over the money after it’s left your bank account, could be sensible. Yes, inheritance tax could still be payable on the loan and you may even have to pay tax on the loan interest (if you charge it) but, at least you’ll have some control.
Get Thing Set Up Clearly…
If you go down the loan route, it’s so important to have everything clear. Few things create more animosity within a family than money. I’m sure you’ve heard some horror stories, I know I have! Setting things out clearly, including the expectations you have of each other is ESSENTIAL should you go down this route.
My view is that you should invest in getting professional advice from someone who knows what they’re talking about. That would probably be a qualified solicitor. Sure, it will cost, but better to start off on the right foot than to find out later on that things could have been done better.
Inheritance Tax?...
I meet quite a few people who have, on paper, more money than they need. They have enough income to live the lifestyle they want and, therefore, aren’t likely to spend all their capital. This is a brilliant position to be in and, if it applies to you, well done! All those years of being sensible has paid off!
Alternatives…
But do you really want the taxman to take 40% of a big chunk of it after you’ve gone? Probably not. There ARE things you can do about it but you need to understand them clearly and, as I said earlier, what the pros and cons are. Nothing’s straightforward when it comes to tax!
For example, you could act as a guarantor to a mortgage that your loved ones are taking out by using your income, the equity in your own home or money you have behind you as security which could, for example, cover the deposit. Mortgage lenders can be pretty flexible in this regard.
Sure, it won’t be a gift but it certainly could be a way of helping them out WITHOUT it causing the potential problems that gifting or lending could. Certainly something to think about.
Big Decisions…
Whatever you decide (even if it’s to do nothing), this all represents some big decisions and, to a degree, I don’t envy you. As long as you know what you’re doing and what the pitfalls are, however, there’s no reason why it might be very sensible thing to do.
Something that could help out the people you love most and, at the same time, giving you that warm feeling that you were able to impact positively in their lives. This is a bit cheesy, but I heard an expression once. ‘It’s nicer to give money to the ones you love with warm hands, rather than cold hands’!
Anyway, that’s me done for now. Get in touch if you need us, otherwise I’ll be in touch with you soon.
Best wishes…