Wanting to help out your children financially is an understandable instinct for a parent.
You’ll no doubt want them to stand on their own two feet as they make their way in the world. But, given the potential challenges they face such as student loan debts and the cost of getting a foot on the housing ladder, it’s perfectly understandable if you want to give them some financial assistance.
Indeed, according to a report in the Daily Mail, SunLife estimate that the Bank of Mum and Dad (BOMAD) has handed out £98 billion in the past five years.
Additionally, research carried out by Royal London reveals that 55% of financial advisers say their clients are more worried about their family’s future financial security than their own.
However, regardless of how tempted you are to help, there are some particularly important issues you need to consider. Here are five for you to think about.
1. You need to make sure you can afford it
There’s little point in using your wealth to help solve one family financial problem if you create another, potentially worse, problem by doing so.
Understandably, you will want to help your children, but it’s important to prioritise your own long-term financial plans, and your future quality of life.
This is especially the case if you are close to retirement, or have already stopped working, and will be living on your accrued wealth and no longer earning an income as a result.
Carefully review your income and expenditure to see how any sum you want to give your children could affect your own financial position.
2. You need to have a clear idea of where the money will come from
If you are comfortable that giving money to your children will not affect your financial security, you then need to decide how you’re going to raise the amount concerned.
The three most common sources are:
- Drawing from your current savings
- Selling investments you hold
- Taking the money from your pension fund.
If you are considering using money you may have set aside in savings and investments, you should carefully consider what your previous plans were for the money concerned – unless, of course, you had earmarked it all along for BOMAD purposes.
One simple measure is to think about whether the planned use was a necessity or a luxury purchase.
For example, if you had previously allocated the money for important work on your property, or to cover future health costs, giving it to your children may be problematic. Conversely, it may be easier to lend or give from money you’d originally intended to use for a luxury holiday.
It may be best if you do not look to use your emergency fund for BOMAD purposes.
As the name suggests, you have set it aside for a stated purpose. So, giving it away could leave you facing an unwelcome bill at some stage in the future with the possibility of having to resort to expensive short-term borrowing to pay it.
3. Taking money from your pension could affect your income in retirement
You can currently access your accrued pension fund from 55 (rising to age 57 in 2028). Furthermore, aside from the maximum of 25% that you can take free of tax, there is no limit on how much you can draw at once – although this may be subject to Income Tax.
That said, you need to be comfortable that taking money from your retirement fund in this way won’t have a detrimental effect on your future plans after you stop working.
Perhaps more importantly, as you have already read, you need to assess how taking out a lump sum could affect your current and future quality of life if you’ve already retired.
Because of how important the decision to draw money from your pension fund for purposes other than providing you with income in retirement is, we would recommend you get expert financial advice before taking this step.
It’s important to avoid jeopardising your own future financial wellbeing.
4. Be clear if it’s a gift, or a loan
While your inclination may be to gift money to your children, once you have assessed your own finances, you may want to consider making the exchange a loan.
As well as potentially helping secure your future wealth, you may believe that asking them to repay a loan could instil an element of personal responsibility when it comes to them managing their money.
As with any financial agreement, it’s important for both parties to understand what is expected, and to put the details in writing.
Such detail may seem to be excessive for a family financial matter, but circumstances and relationships can change, so it always makes sense to protect yourself.
Regardless of whether you decide to make a gift or a loan, it’s important to keep an accurate record of the transaction for your own records.
5. 3 tax issues to bear in mind
As well as issues around your future finances and the status of the handout, there are three different taxes to be aware of if you’re considering giving money to your children.
Some careful tax planning may be required, with regard to your own tax position and the amount you can give.
1. Inheritance Tax
One big advantage of giving your children money is that you could reduce the future Inheritance Tax (IHT) liability on the value of your estate when you pass away.
You’re able to gift £3,000 in each tax year and also carry forward the same amount of unused allowance from the previous year.
Your spouse or partner can do this as well, meaning that you could make an immediate gift of up to £12,000 with no future tax liability.
Above that figure, however, further gifts in excess of your nil-rate band (£325,000 in 2024/25) may be seen as potentially exempt transfers (PETs). Unless you survive for seven years from the date you make the gift, some or all of the amount may be included in the value of your estate for IHT purposes.
Because of this, and the complexities involved, we would strongly recommend you get expert advice before making any substantial gifts of this kind to your children.
2. Income Tax
You may be minded to gift money to your children out of the accrued value of your pension fund. However, you should be aware that any money from the taxable 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 be particularly impactful if you are a higher- or additional-rate taxpayer, as you could be liable to pay 40% or 45% tax respectively on this amount after you declare it in your self-assessment tax return.
3. Capital Gains Tax
To raise the money to give your children, you may be intending to sell shares or other invested assets.
If this is your intention, you need to be aware that you may be liable to a Capital Gains Tax (CGT) charge when you do this.
For the 2024/25 tax year, you have an annual exemption of £3,000 profit that you will not be liable for CGT on.
However, if the money you are giving is in a tax-efficient Stocks and Shares ISA, the profits you realise are not subject to CGT.
Get in touch
If you would like to talk about your own possible BOMAD plans, and the best way to give money to your children, please get in touch with us.
Please note
The value of your investments can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
This article is for information only. Please do not solely rely on anything you have read in this article and ensure that you conduct your own research to ensure any actions you may take are suitable for your circumstances. All contents are based on our understanding of HMRC legislation, which is subject to change.
