When is a loan, not a loan?
When the lender hands over cash without expecting to see any of it back.
In fact, it might as well be called a gift; and gifts can be a great way to reduce Inheritance Tax (IHT) on your estate. There’s a plan forming here…
Before we get ahead of ourselves, though. Let’s look at the figures.
Parents don’t expect loans to be repaid
Research from Prudential has shown that 44% of parents who have lent their children money feel it is unlikely that they will be repaid.
It hasn’t stopped them, though, as 68% of parents have already loaned money to their children, or plan to do so in the future. Additionally, children who have borrowed sums from their parents have taken an average of £12,700, whilst 11% have loaned their children a lump sum in excess of £20,000.
The 32% of parents who have not loaned money to their children hope to be able to do so, in the future.
Reasons for lending large sums
Many parents are not lending their children money for trivial reasons. With the younger generations struggling to get onto the housing ladder or access credit, it is not surprising that the top reasons for lending money are:
- Purchase of a house 39%
- Purchase of a car 28%
- General living expenses 21%
- Student debt 16%
- Credit card debt 16%
Helping children to buy a house or car is a sensible decision, as it helps them to get on in life and can even form part of an investment for their future. Similarly, assisting them with debts means that they can access better options and start their financial planning with a clean sheet. It will also improve their credit score, giving them access to a wider range of financial products when they are needed.
Worryingly, over one fifth of parents are lending children money to pay for general living expenses. This can turn into an ongoing habit and could damage the financial security of the parents in later life, especially if that money is coming from savings or pension funds.
Give money on your terms
If you can afford to give your children lump sums when they need it and not worry about being repaid, that’s great. We’ll come back to that.
However, if you plan to lend your children sums from your own pensions, investments and savings, but worry about being able to afford the quality of life you aspire to in later life, you need to make arrangements to get it back.
No-one wants to see their child suffer financially, but it is up to you as a parent to make sure that they are equipped to make sound financial choices. Talk through the options with them and make sure that there is a plan in place for the money to be repaid in a way which they can afford to do so.
It might sound harsh, but this is not the time to let your heart rule your head.
I can afford to not be paid back
If you don’t want the money back from your children, that’s fine and you may even be able to take advantage of some potential IHT benefits, including:
- Gifts from income
- Potentially exempt transfers
- Giving gifts, which are under the £3,000 annual IHT exemptions amount
For more information on lending money to family members, estate planning or IHT, feel free to get in touch.