3 questions to ask if you’re thinking of opening the Bank of Mum and Dad

Father and son talking on sofa

What better way to use your wealth than to support your children and grandchildren when they need it, whatever their age?

Indeed, research published by IFA Magazine has revealed that a third of Generation X parents (those born between the mid-1960s and late 1970s) are financially supporting their adult children.

However, while it might feel natural to help your children by giving them money, it’s important to consider how this could affect your long-term financial plans.

Read on to discover three important questions you might want to ask yourself before opening the Bank of Mum and Dad.

1. How much money does my child or grandchild need?

Having a clear understanding of the amount of money your child or grandchild needs could help you decide on the level of financial support you’re able and willing to give.

While money remains a taboo subject in many families, open and honest discussions about your child or grandchild’s financial situation – and potentially, your own – could allow you to set boundaries and manage expectations.

This might reduce the risk of disagreements and misunderstandings if you decide to make an offer of financial support.

Additionally, deciding on how much money you’re going to give your child or grandchild, could allow you to factor this commitment into your financial plans so that you don’t compromise your long-term goals.

2. Is my child or grandchild expecting a gift or a loan?

Giving a large lump sum as a gift will likely have a very different effect on your financial plans than providing a short-term loan.

So, it’s important to find out what your child or grandchild’s expectations are.

Gifting money

If they need more money than they can realistically repay, you might decide to gift your children or grandchildren some of their inheritance during your lifetime.

This could allow you to help them when they need it the most. Furthermore, you’ll be able to enjoy seeing them benefit from your wealth.

Making gifts can also be a tax-efficient way to pass on some of your assets. This is because gifts often fall out of your estate for Inheritance Tax (IHT) purposes, provided you survive for seven years after making them.

There are several annual allowances you could use to pass on gifts to reduce a potential IHT bill.

For example, you can use your annual exemption to gift up to £3,000 (2023/24) and this sum will fall outside the value of your estate. Or, if your child is getting married or entering into a civil partnership, gifts of up to £5,000 will usually be exempt from IHT – or up to £2,500 for a grandchild or great-grandchild.

Alternatively, if your child or grandchild would benefit from ongoing support, you could take advantage of the “gifts out of surplus income” exception to make regular payments without incurring IHT, provided you meet the criteria.

However, the rules can be complicated, so you might find it beneficial to seek advice from a financial planner, who can help you give gifts tax-efficiently so that your loved ones receive more of your wealth.

Read more: Only 430 people used this valuable Inheritance Tax exemption this year – did you?

Giving a loan

Alternatively, you could offer a loan which your child or grandchild must repay over an agreed period of time.

It’s important to set clear expectations – such as when repayments will start and whether you’ll charge interest – to avoid misunderstandings.

It might be helpful to put your agreement in writing or even seek legal advice.

3. How could my financial plans be affected by opening the Bank of Mum and Dad?

Before opening the Bank of Mum and Dad, it might be wise to ensure that you have enough savings to meet your own needs.

How much is “enough” will depend on the lifestyle you expect to have for the rest of your life, when you plan to retire, and how long your retirement could last.

Life expectancies are generally longer than they were several generations ago, so your retirement could last 30 years or more. Additionally, your spending habits may change over time – for example, you might need to factor in the potential cost of later-life care when planning your finances.

Getting to grips with future financial needs may feel overwhelming and complicated.

Fortunately, a financial planner can use cashflow modelling to help you assess your future income needs allowing you to gauge a level of support for your children that won’t compromise your own long-term financial goals.

A financial professional can also work with you to help you discuss and plan your finances as a family.

If you’d like to learn more about incorporating support for your adult children or grandchildren into your financial plan, we can help.

To find out more, please get in touch. Email or call us on 01454 416653.

Please note

This article is for general information only and does not constitute advice. The information is aimed at retail clients 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, cashflow planning, tax planning, or will writing.

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