The Bank of Mum and Dad

Parents and grandparents with cash to spare will often want to help the younger generation. They have plenty of options, but it’s key to consider the tax and risk implications. FINANCIAL GIFT - With a straightforward financial gift, the recipient won’t have to pay any income tax on it but it can affect inheritance tax. The simple principle is that any money you give as a gift will still count towards the value of your estate (and potentially attract inheritance tax) except in specific circumstances. One exemption is time: if you live more than seven years after making the gift, it’s not counted towards your estate. If you die between three and seven years after the gift, a special lower inheritance tax rate applies depending on the precise time. If you die less than three years after the gift, it’s covered by the normal inheritance tax rate. You also have an annual exemption that means the first £3,000 you give away each year isn’t counted as part of your estate. A separate one-off exemption covers a gift for a wedding or civil ceremony: £5,000 for a gift to your child, £2,500 to your grandchild and £1,000 to anyone else. SCHOOL FEES - School fees for a grandchild are also exempt, though this only applies if you make regular payments and it’s clear you can afford them. Finally you can give up to £250 a year to any individual who isn’t covered by any other exemptions. SAVINGS PLAN - One alternative to an immediate gift is to put money into a savings plan, for example with the aim of helping the child with university costs when they turn eighteen. A Junior ISA is a way to do this without attracting tax on the savings or growth. It comes in both cash and stocks-and-shares versions. Only a parent or guardian can open a Junior ISA, but anyone can put money into the Junior ISA once it’s open. Legally the money belongs to the child, though they can’t withdraw it until they turn eighteen. FIRST HOME - Perhaps the most common way to financially help a child or grandchild is with their first home purchase. If you provide the money for a deposit, it has the same rules regarding inheritance tax as any other gift. You’ll have to confirm you are not claiming any financial interest and you may have to provide bank statements for money-laundering checks. You can act as a mortgage guarantor in which you become responsible for the payments if your children or grandchildren fall behind. That’s a risky proposition and you should never consider it without expert advice. That’s also true of a family deposit mortgage where you put the deposit money up front. If the borrower makes all the scheduled payments for a set period (often five years), you’ll get the money back, sometimes with interest as well. It’s also worth exploring a family offset mortgage. This lets you put savings into a special account, temporarily lowering the figure used to calculate interest charges.

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