The Bank of Mum and Dad – how generosity now might affect your own futures and becomes an issue within divorce
As any parent will know, it’s hard for young people to get on the property ladder in our surrounding areas of Reading, Berkshire, Hampshire and Surrey. Yet the average scope of parental involvement financially is considerably more than you might expect. Director Anne Leiper explores the implications for parents and grandparents, particularly within a matrimonial or relationship breakdown context.
£5.7billion mortgage lender
According to a survey by Legal & General and the Centre for Economics and Business Research, parents and grandparents give an average of £18,000 to help grown-up children buy a home of their own. That makes the UK 2017 Bank of Mum and Dad the equivalent of a £5.7billion mortgage lender.
Can you afford it?
One worrying result of this kind of gifting is that 17% of over-55s are already, or will be, financially worse off as a result of their financial support. According to the survey, 20% of parents and grandparents sacrificed their own standard of living to raise the finance, including:
- Downsizing to a smaller home
- Taking money out from pension pots
- Using equity release schemes
- Postponing retirement
What concerned those conducting the survey was that less than 24% of those gifting money to family and friends did not seek professional advice first, or even look for information online. In addition, 10% of those surveyed said they felt less financially secure, and those nearing retirement felt the strain of this most keenly.
My gift to you, son - but not to your spouse!
Needless to say, this kind of gifting and financial support has implications on joint assets and finances for years afterwards. Gifts may also incur inheritance, income or capital gains tax. Equally, withdrawing money from a pension will reduce its value, and this will be reflected in the income value obtainable for any annuity plan. Therefore, I would strongly urge anyone considering such gifts to seek specialist tax advice.
From a matrimonial perspective, we regularly deal with cases where gifts or loans from a parent become a major issue within the financial settlement. There are regular disputes as to whether the monies were a gift, or a valid loan to be paid back.
- If it was a gift, was it to both parties?
- If it was a loan, who is responsible to pay it back?
Write it down!
As a family lawyer, I see first-hand just how complex financial settlements in divorce can become when transactions such as gifts are not properly documented. We’d echo the advice given on the Money Advice Service website, which is:
“If you’re thinking about giving away money or assets to your family and friends … it’s very important you make a record of:
- what you gave
- who you gave it to
- when you gave it
- how much it’s worth.”
We’d also always suggest clients talk to a professional financial advisor before gifting money as the tax exemption rules are complex. You can find more information at https://www.gov.uk/inheritance-tax/gifts.
Gift, loan, or joint investment?
It is crucial to make clear exactly what the basis is for your financial support. You may choose to give the money as a gift, it might be a loan that requires repaying, or it might be a co-investment with your child in the property. Whatever method you use, you need to document the details in case of later disagreements or parting of the way for either parents or grown-up children.
It may seem rather cold and calculating to make children ‘sign on the line’ for money, but you only need to watch an episode of “Judge Rinder” to see just how heated exchanges can get without a paper trail or an underlying agreement!
Assets and divorce financial agreements
Even the most amicable of divorces will usually involve full disclosure of finances and assets. This is crucial for the drawing up of a fair and balanced financial settlement for both parties. Whilst we do need occasionally to unearth deliberately hidden assets and financial dealing for our clients, the majority of the time it’s more a case of “Oh I’ve just remembered that we lent x the sum of y” that can cause delays and require a major recalculation.
In reality most people gift money to their natural child primarily to ensure they benefit from some of their inheritance upfront, and to help them have a more comfortable life. Few people would want a soon-to-be ex daughter or son in law to benefit from their hard earned assets.
The courts can deem monies from parents to be ‘soft debts’. This can mean that their repayment is not the main priority, causing more hardship to the parent who provided the funds.
Therefore our firm advice, is to fully record in a legal document the basis and intentions behind any monies given as a loan.
If it is a gift you may need to consider who you are gifting it to.
Raising finances on your own home
Schemes such as equity release may have implications if you wish to keep your home as part of your divorce settlements. You’ll find more details in our recent article “Mortgages and divorce: Will I keep my home?”.
Concerned about the potential impact of divorce on your ability to support your children?
Call us to discuss your individual circumstances. We can offer expert legal advice on your position, and help you move forward with confidence. We can point you towards professional financial advisors who understand that divorce is a major step both personally and financially.