Time for Bank of Mum and Dad to get payback

How helping your children onto the property ladder can work for you

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Ever since the Bank of Mum and Dad opened for business, it has been a terrible business model for parents. They fork out a small fortune to help their adult children with everything from everyday bills to getting on the property ladder. In return, they get nothing. But it doesn't have to be this way.

Statistics released earlier this week revealed that the Bank of Mum and Dad is in fact the biggest mortgage lender in the UK for first time buyers - as parents see the only way their children will ever get a place of their own is if they hand over a lump sum.

But while many parents give this cash, with little or no benefit to themselves, there are ways families can use this gift to work in their favour.

Inheritance Tax Planning

At the very least, it can be a useful way to cut your tax bill. Sean McCann, Chartered Financial Planner at NFU Mutual says: "Making gifts to help out the younger generation can be a very effective way to reduce any future inheritance tax bill. While you normally need to survive seven years for a gift to be free of IHT, there are exemptions. You can give away up to £3000 each tax year free of IHT, if you haven't used the previous year you can go back one year and get it, allowing you to give away £6000 immediately free of IHT."

In addition, you could structure the help you offer as a monthly payment instead of a lump sum - either in order to help the save towards a deposit, or to help pay the mortgage. McCann explains: "One of the most valuable but least known exemption is the 'Gifts out of normal expenditure'. It allows you to give away an unlimited amount of 'surplus' income, exempt from IHT provided the gifts are regular and do not impact on your normal standard of living. The big benefit is that there is no need to survive for 7 years for it to work."

Income payments

For many parents, long-term income generation is the ultimate goal, and if they have helped their child get a foot on the property ladder, they can use this to generate an income.

They may, for example, enable their offspring to purchase a place with a spare room or two to rent out - on the understanding they receive some of the rent. Alternatively, their children could arrange to pay them back through a monthly sum - thereby producing an income.

Investment

If they have several years until they require an income, they may chose to buy the property alongside their offspring, and take a share in the property. This enables them to benefit from any rises in property prices, generating a bigger lump sum when they come to sell.

Protect yourself

There are plenty of ways parents can benefit from getting their kids on the housing ladder, but it's essential that they protect their investment. It's up to you how formal you make any arrangements, but you need to be clear what will happen if the children cannot afford to pay each month, for example.

Likewise, if parents take a share in the property, it's best to draw up an agreement for what will happen if they need the lump sum back - regardless of whether their offspring want to sell at that point.

Finally, Alison Hawes, family law partner at Irwin Mitchell says you need to protect yourselves against your children's love lives. She explains: "Imagine a house bought for a daughter by her parents, that her boyfriend moves in to. There is no clear agreement but he takes over the loan repayments to her Mum and Dad because he has good job and she gets made redundant. She tells him it is 'our house' and when they split up, because of the payments and what she said, he claims a percentage of the equity of the house even though it is in her name."

"You can ask the partner who moves into a house you own to sign a deed of surrender meaning that even if they pay the gas bill from time to time, you have a legal document to show that it was never your intention to share the equity in the property whatever you might have said in the heat of the moment."

She adds: "We've seen an increase in the number of parents who require a child to have a prenuptial agreement in place with their partner or spouse, before they will lend them money to get a foot on the property ladder. It's a sensible idea because parents want to protect their assets and investments, which may form part of an inheritance or retirement fund, in the unfortunate scenario of their offspring suffering a relationship breakdown."

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