To gift or not to gift? That is the question
Parents often have surplus cash saved up and are keen to help get their child onto the property ladder for the first time.
Increasingly, children are looking to their parents to assist with the purchase of a home. Parents often have surplus cash saved up and are keen to help get their child onto the property ladder for the first time.
However, at the same time as wanting to help with the purchase, most parents are just as concerned about how best to protect the cash for their own benefit and their child’s.
Common worries are ‘what happens if my child subsequently gets divorced?’, ‘what happens if my child subsequently gets made bankrupt?’, and ‘what if I need the money back in future for my own care costs?’.
All very valid concerns.
When advising parents, the first thing to keep in mind is that there is a range of options available, each with different advantages and disadvantages, which need weighing up to see which is best in their particular circumstances.
Typically, there are four main options available:
Option 1 - Outright gift
- The simplest option is for parents to simply make an outright gift to their child.
- The advantages are that this is simple and straightforward, and can have the added benefit of being effective inheritance tax planning
- The disadvantages are that once the money is gifted, there can be no strings attached. There is no guarantee the cash can ever be returned and it is fully at risk of being lost to divorce or bankruptcy proceedings.
Option 2 - Soft loan
- Rather than making a gift, parents could lend the money to child. This is often on an interest free basis, repayable on demand. The aim being to try and show that the money is repayable at some future point, should parents need to try and protect the cash.
- The advantages are that it is still relatively straightforward and there is the option to endeavour to reclaim the money if child subsequently gets divorced or made bankrupt, or for any other reason parents need the money back.
- The disadvantages are that because it is a ‘soft loan’, which basically means a simple arrangement, rather than a commercial loan, it can be argued that even if the money was genuinely a loan, rather than a gift, there was never any real intention to repay the loan in the first place. A soft loan therefore does have risks attached, but if it is recorded in writing, it can be better than nothing.
- There is also the potential drawback that by not making a gift, the value of the loan remains in parents’ estate and would therefore be taxable on death.
Option 3 - Hard loan
- As an alternative to a soft loan, parents could make the loan on a more commercial basis. This would often involve setting repayment terms, securing the loan over the property that the child purchases, and really trying to show that this is a genuine loan and parents always anticipate the sum to be repaid.
- The advantage is that such a loan would be viewed as genuine, and so should the money ever need to be recalled by parents for whatever reason then the loan agreement may be enforced.
- The disadvantages are that there is added complication in dealing with securing the loan over the property being bought, there can be income tax consequences if the loaned amount is subject to interest, and as with a soft loan the value of the loan remains in parent’s estate and would be subject to inheritance tax when parents die.
- It is also not guaranteed that a ‘hard loan’ between family members would always be repaid on a divorce or bankruptcy.
Option 4- Outright gift to a trust and then a soft/hard loan
- The final option is an attempt to gain some of the advantages of a loan, whilst at the same time getting the value of the loan outside of parents’ estate for inheritance tax purposes. This is achieved by parents gifting into a trust, and then the trust loaning the cash to child (either a soft loan or a hard loan).
- The advantages are that this offers the best level of protection for parents and child, whilst at the same time starting the 7 year clock for inheritance tax purposes.
- The disadvantages are that there is extra administration involved in setting up and keeping required records with a trust.
The complexity, and therefore the cost of setting the arrangement up, increases as we go from Option 1 through to Option 4, but at the same time so does the amount of protection offered for parents and child.
The important point to keep in mind is that no one option is best suited for everyone and before deciding to help their child with the purchase of a property, parents should always take advice as to which option is best for them.
At Weightmans, we are able to offer a collaborative approach to legal advice, with specialists from our Wills, Trusts and Estates team working closely with our Family team and Residential Conveyancing team to ensure our clients can make an informed decision as to what option to choose.
For any further information regarding any of the issues raised in this article, please contact David Stokes, Principal Associate, on 0113 213 4059 or firstname.lastname@example.org