Should you lend money to your children?

There are important factors to consider when providing financial support to children purchasing a property

Soaring house prices mean it is becoming increasingly difficult for young people to get on the property ladder, and parents are playing a larger role in helping out their children financially. Research from the Centre for Economics and Business Research shows that parents are predicted to lend around £6.5bn to their children in 2017.

While you can play an important role in helping your children to buy their first home, there are issues to consider if the process is to go as smoothly as possible, says Helen Morrissey, Personal Finance Specialist at Royal London.

Parents should be aware of issues such as the potential tax implications, and think about how giving away or lending a large sum could affect them further down the line

“Making the decision to hand over a large sum of money, whether as a loan or a gift, is a major financial commitment,” she says. “Parents should be aware of issues such as the potential tax implications, and think about how giving away or lending a large sum could affect them further down the line if their circumstances change.”

By planning ahead and considering the various options, you can help your children get that all important first step onto the property ladder. Royal London’s Good with your Money: Five things to consider before opening up a branch of the bank of mum and dad guide gives some hints for areas to think about.

Deciding whether the money will be a loan or a gift

Disagreements can occur when money is handed over without both sides understanding the terms. For instance, parents can hand over money believing it is a loan to be repaid, whereas the child may see it as a gift.

Although it may seem a little formal, setting out expectations in writing can save a lot of heartache. It means both parties enter the arrangement with a full understanding of what is expected of them. If you’re unsure, you can seek legal advice to help draft the paperwork.

Can you manage without the money long term?

When deciding to give away or lend a large sum of money it is worth considering that your financial circumstances can change. Children may initially be able to afford repayments, but what happens if they have children of their own? The cost of maternity leave and childcare can eat into budgets and compromise their ability to repay the debt.

Similarly, parents may also experience changing circumstances. A divorce, or time off of work due to ill health, can mean finances become stretched.

While making a loan now may be affordable, you must consider how a major life change might affect your financial wellbeing.

The potential impact on your tax position

There are several potential tax issues that should be considered before deciding to make a gift to support your child’s house purchase:

Repayment default

Even if you lend money to your child and agree a schedule of repayments, it is important to consider that they may not be able to keep them up. Long-term absence from work, or the loss of a job, could have a major impact on whether repayments can be made.

Such a situation can put your relationship under considerable strain, and you may find yourself under increased financial pressure as a result. Parents should ask themselves how they would cope financially if the money were not returned.

A change in your child’s relationship status

Helping your child set up home with a partner can be an exciting time, but what happens if they split up? While it can be a hard topic to broach, it is worth considering when setting up financial support. Properties can either be held as joint tenants, where both parties hold an equal share, or tenants in common, where parties can specify their share in the property. If sold, each partner receives the share allocated to them.

If parents have contributed towards a deposit then legal support should be sought to get a declaration of trust beneficial interest in place. This legally binding document clarifies what each person has paid towards deposits, fees or mortgage payments. Should your son or daughter split with their partner there is a legal record of who has paid for what.

Cohabitation and pre-nuptial agreements can also be useful in terms of setting out how assets should be apportioned in the event of a break-up. It is worth speaking to a solicitor about how to draft the documentation.

There are other ways you can help your children onto the property ladder. You could act as guarantor, for instance, or utilise equity release. It is a good idea to seek financial advice to help determine the most appropriate way to do this.

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