Bank of Mum and Dad

Tips for parents running the Bank of Mum and Dad

More support is needed for parents loaning or gifting their children money to get on the property ladder
through the Bank of Mum and Dad.

That is according to research by equity release advisor, Key, which discovered many parents aged 55 plus thought gifting rules were too complicated and were worried about making mistakes. 

A quarter admitted they were concerned they didn’t have the financial knowledge to make decisions in their role as Bank of Mum and Dad, and many said they would welcome more guidance. 

Now Key has offered advice to parents in this situation to help boost their confidence when supporting their families financially. 

Dean Mirfin, chief product officer at Key, said collectively Bank of Mum and Dad was a major UK financial institution – but it needed advice and guidance so that parents felt empowered to make the right financial decisions for themselves and for the next generations. 

He added: “Older homeowners in the UK own as much as £1 trillion in housing wealth according to our estimates and are also likely to have generated significant pension wealth as well as other retirement savings. 

“The challenge for parents wishing to lend or gift money is to decide which assets are the most appropriate and most tax-efficient for gifting. We believe advice is key.” 

Seek professional advice 

Indeed, amongst its tips released to help parents considering loaning or gifting to children or grandchildren, Key urged over 55s to seek both independent financial and legal advice. This, it said, would provide peace of mind they were making the right decisions. 

But it said it was also important to talk though the details of the loan or gift with the recipient. Mirfin explained: “It’s good to talk. Money can be a taboo subject. Don’t let it be. Talk about exactly what you can afford and what is fair. Make sure it is clear from the beginning whether the money you are giving is a gift or a loan. 

“It can be confusing and could lead to an embarrassing conversation if this is unclear from the start.” 

Be transparent 

What’s more, parents should be transparent about who the money will benefit. This is relevant if, for example, the money is for a family member who is making a joint purchase with their partner. 

Draw up a contract and outline your intentions 

Mirfin explained if you are giving all or part of the money on a loaned basis, it will be worth drawing up a contract outlining repayment terms. This is because, even if you are relaxed or laid back about when the money is repaid, circumstances can change so having the agreement in writing can be useful. 

What’s more, if you want the money to be spent specifically on a property purchase – make sure this is clear. Mirfin said: “Consider helping the recipient put it into a Help to Buy ISA or releasing the money only when they’ve found the house they want to buy.” 

Will we be taxed? 

Many people are concerned about how they might be taxed if they enter into a financially agreement with their family. Mirfin explained you can gift any amount of money you like to your children without being taxed immediately or potentially at all. 

However, if you pass away within seven years of the transaction there could be tax implications. 

Choose assets wisely 

Many people who are in a position to help their family might have developed their wealth through a variety of means – property, pension assets or ISAs to name a few. Key suggests considering carefully which assets were best to access. A financial adviser can help with this. 

Can you really afford it? 

Finally, Mirfin suggests anyone considering helping their children or grandchildren with a major financial move should think carefully about whether it’s financially viable to do so. 

“It’s vital to consider your own financial future before thinking about gifting or loaning money,” he explained.” Your retirement income, potential cost of care and house refurbishments are the sorts of things to factor into your decision. 

“If you are unsure, seek the advice of a professional adviser.”