In August 2022, the estate agent Savill’s suggested that the Bank of Mum and Dad will gift or loan around £25 billion over the next three years. The gifts will help children through the cost of living crisis while supporting almost half of all first-time buyer property purchases.
This generosity is set against the backdrop of global financial uncertainty. Forecasts suggest we could see a global recession in the first half of 2023.
At home, the BBC reports that the UK economy narrowly avoided a recession last year, thanks to the zero growth achieved between October and December 2022. (Even a slight loss would have meant an official recession). But 2023 will still be a struggle for many.
With inflation remaining high, the cost of borrowing increasing, and energy bills set to soar again from April, might now be the right time to close the doors on the Bank of Mum and Dad?
Keep reading to find out.
The pandemic saw financial help from parents rise across multiple areas
The pandemic hit younger workers – those most likely to be employed in the gig economy – harder than most. This led to parents offering financial and emotional support beyond the traditional help onto the property ladder.
In fact, interactive investor confirmed back in January 2022 that helping toward a deposit on a first home is only the 4th most likely way for the Bank of Mum and Dad to offer financial assistance.
More common forms of help are:
- Towards university costs (58%)
- Allowing adult children to stay at home, rent-free (50%)
- Buying a car or helping with car-related costs (46%).
Contributions to a house deposit, meanwhile, accounted for 42% of the Bank of Mum and Dad’s help.
The rise of so-called “boomerang children” – adult offspring returning to the family home amid rising living costs – is just one reason why now might be a good time to reconsider the help you give.
Refusing to offer financial help isn’t easy, and you’ll need to ask yourself some tough questions.
3 questions to ask yourself when contemplating closing the Bank of Mum and Dad
1. Can I afford to keep paying out?
Figures published by interactive investor found that only 14% of those surveyed claimed to offer no help at all to their children. Of the remaining 86% that did provide help, how many could afford it?
Research from February 2020, before the pandemic and the sharp rise in living costs, found that around 40% of parents who helped children onto the property ladder saw their living standards detrimentally affected.
Of those parents financially affected, many had cancelled holidays, sold a car or cancelled club memberships and subscriptions to provide the payment. Around 20% had to cash in savings and investments to help meet their living costs once the gift had been made.
2. What about the tax implications?
Canada Life reported in July 2022 that almost half (48%) of UK adults currently supporting family members financially will struggle to continue doing so over the next 12 months.
While that takes us into the second half of 2023 – when the economy is expected to begin its recovery – the implications of a cash gift are more far-reaching.
The gifts you make to your children that fall outside of certain HMRC allowances could become subject to Inheritance Tax (IHT) at 40% if you die within seven years of making the gift.
If you intend to leave an inheritance to your children, you might consider giving while living. This shifts the emphasis away from a handout from the Bank of Mum and Dad. You’ll need to be aware of HMRC’s IHT exemptions and be very clear that the money you give is an early inheritance rather than a gift or loan.
With the IHT nil-rate and residence nil-rate band currently frozen until 2028, this could be a great way to help your children while lowering a potential future liability.
3. Will I be covered if I need later-life care?
Deciding if you can afford to gift to your children isn’t simply about whether you have the money now.
Remember that your retirement outgoings aren’t static. In the same way that you probably spent more money in the early, active years of your retirement, you could find your outgoings actually peak in later life. This is especially true where later-life care is required.
Closing the Bank of Mum and Dad now could save you huge financial problems further down the line.
At Globe, we can help you put a plan in place that manages your finances for the whole of your retirement, covering you whatever the future brings.
Get in touch
If you are worried about the level of financial support you are currently offering, we can help. Please email hello@globeifa.co.uk or call us on 020 8891 0711 to discuss how Globe IFA’s expert financial advisors can help you.
