Could “Bank of Mum and Dad” result in some unexpected tax implications?

It is often reported that younger generations are increasingly reliant on the “bank of mum and dad”. Parents and grandparents often wish to assist their family where they can. A survey by Key Retirement shows that 58% of parents and grandparents want to be able to help their children and grandchildren onto the property ladder, 18% wish to help pay off debts and student loans and 13% intend to assist with funding a wedding.

This assistance can easily be costly! The average cost of a terraced house in Yorkshire now stands at £135,000 and the average cost of a semi-detached is around £163,000. A 20% deposit for a first home could therefore be in the region of £27,000 - £33,000. With student fees currently up to £9,250 a year, this could add up to £27,750 for a standard three year course. A wedding can also be a costly affair, with the average wedding cost now estimated to be in the region of £25,000.

When you consider these significant sums it is understandable that parents and other family members may wish to assist with some of these costs if they are able to. However, the survey also found that nearly half of parents and grandparents don’t understand the tax rules on gifting.

A gift of a significant cash lump sum can remain within the Inheritance Tax estate of the donor for seven years after the date of gift.

There are various inheritance tax exemptions which may assist with tax planning, including an annual exemption of £3,000 and a wedding exemption which allows for tax free gifts on marriage, with the value dependent on what relation you are to the bride or groom. There is also an exemption against gifts made out of excess income, which can be very useful provided the relevant records are kept.

Pre-owned property rules may apply should you receive a benefit from any assets you have provided some of the funding for. Therefore a gift of cash to purchase a property in which you then live in a “granny flat” may result in some unexpected tax consequences.

As well as Inheritance Tax implications, there may also be other tax implications where you are assisting family members, even where you are not making an outright gift. For example, a purchase of a property in your own name for your children, perhaps for them to use whilst they are at university, could potentially result in a capital gains tax charge when the property is sold. However, some simple planning can allow relief to be claimed against capital gains made whilst your child is living in the property.

Should you be considering assisting your children, or other family members, with a significant gift or purchase of a property, it is worth seeking advice from a tax professional beforehand. Good advice can ensure that you will not fall foul of the tax rules and instead that any assistance is structured in best possible way for your own personal circumstances.