Bank of Mum and Dad: 4 vital questions to ask yourself before you say "yes"

Calling on the “Bank of Mum and Dad” (BOMAD) is an increasingly common way for young people to meet their financial requirements, such as university living costs, and get a foot on the housing ladder.

Indeed, the latest analysis from property firm Savills, reveals that BOMAD handed out £8.8 billion in 2022.

Furthermore, research carried out by Royal London reveals that 55% of financial advisers say their clients are more worried about their family’s financial predicament than their own.

Most parents and grandparents are only too willing to help out as much as they can – but there are important questions you should be asking yourself before you agree to take on the financial commitments your children are asking you to. Here are four of them.

1. Are my finances secure enough to gift or loan money?

While you may well be justified in worrying about the effect the cost of living crisis is having on your children, you should also be equally mindful as to how it could be affecting you.

Your instinct may be to say yes, but before jumping in you need to be sure that you won’t be threatening your current financial stability and future lifestyle. So, before agreeing to any request for a substantial sum of money, make sure you can comfortably afford it.

You should review your income and expenditure, savings, and pension fund, to ascertain how a big financial handout could affect you.

If this review leaves you in doubt, but still wanting to give what you’re being asked to, you could consider:  

• Insisting that the money is given as a repayable loan rather than an outright gift
• If it’s for property purchase, you could ask that you be repaid – either in part or in full – when the property is sold.

In both cases, you’ll then have the comfort that your longer-term financial situation should be under less strain.

2. Can I afford to take money from my pension fund?

The Royal London research mentioned above also revealed that 55% of advisers have clients who are already drawing money from their pension to boost their own income. Meanwhile, nearly 20% have taken money from their fund to help family members financially.

Pension Freedoms legislation means your pension fund can be easily accessed from age 55 (rising to age 57 in 2028) with no limit on how much you can draw.

But you need to be comfortable that taking money from your retirement fund in this way won’t have a detrimental affect on your future plans after you stop working.

If you’ve already retired, you need to ask whether taking out a lump sum will affect your current and future quality of life.

3. What about accessing my other savings and investments?

Beyond your pension fund, you may be considering using other money you may have set aside in savings and investments.

In this instance, your decision should be driven by what the money you’re thinking of giving to your children has been set aside for. The question of affordability could boil down to whether it has been allocated, in your mind, to luxury or necessity.

You may find it easier to lend from money you’d intended to spend on a new car or for an expensive holiday than if it were intended for important maintenance or renovations to your house.

One sum of money we would strongly advise you not to touch is your emergency fund. As the name suggests, that’s there for a specific purpose. Giving it away could leave you facing an unwelcome bill at some stage in the future with the possibility of having to resort to short-term borrowing or access other savings to pay it.

4. What are the tax implications of a gift?

As well as issues around affordability and your future financial plans, there are three different taxes to bear in mind if you’re considering giving money to your children.

The effect of each may necessitate some careful tax planning to mitigate. This applies to the effect making a gift could have on your tax affairs, but will also have a bearing on how much you’re comfortably able to gift.

Income Tax

Any money from the non tax-free element of your pension fund will be treated as income for tax purposes and will, as a result, be subject to Income Tax.

This could mean that, if you’re a higher-rate taxpayer you face a tax charge of 40% on the amount you declare in your self-assessment tax return.

You also need to consider how it affects your wider tax situation in the tax year in question.

Capital Gains Tax

If you’re planning to sell shares or other investments to raise the money to give your children, you should be aware that you may be liable to a Capital Gains Tax (CGT) charge.

The exception to this will be if the money is in a tax-efficient vehicle such as a Stocks and Shares ISA where the profit you earn is not subject to CGT.

If the assets you’re selling are worth more than you paid for them, you could face a CGT bill of up to 28% (if you’re selling a property that isn’t your primary residence) if you’re a higher- or additional-rate taxpayer.

For the 2023/24 tax year, you have an annual exemption of £6,000 profit on which you won’t be liable for CGT. This amount is reducing to £3,000 from 6 April 2024.

Inheritance Tax

One important advantage of gifting money to your children now is you could potentially reduce the future Inheritance Tax (IHT) liability on the value of your estate.

You can gift £3,000 in a tax year and also carry forward the same entitlement from the previous year. Your spouse or partner can do this as well, meaning that you could make a potential gift now of £12,000 with no future tax liability.

However, other gifts will be seen as a potentially exempt transfers (PETs) and may well be included in the value of your estate unless you survive seven years from the date it was made.

For PETs that exceed the current IHT threshold of £325,000, a taper applies. After three years, the amount of IHT due reduces proportionately every year, and falls away completely after seven years. This can be tricky to understand and calculate and is one of the many areas we can help you navigate with confidence.

Get in touch

If you’re considering giving money to your children and are concerned as to how this could affect your future financial plan, please get in touch.

Email info@aspirafp.co.uk or call us on 0800 048 0150.

Please note

The information contained in this article is based on the opinion of Aspira and does not constitute financial advice or a recommendation to any investment or retirement strategy. You should seek independent financial advice before embarking on any course of action.

This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

The Financial Conduct Authority does not regulate estate planning, tax planning or will writing.

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