How to Financially Support Your Grown-Up Children. Part 1

And the tax implications of doing so. 

Helping grown-up children is rarely just about handing over money. It might mean providing a house deposit, paying off a mortgage, supporting a new business or funding grandchildren’s school fees. For some families, it involves passing on property or a business built over decades.

The opportunity is often about making a difference when that help is most useful, rather than leaving everything until death when money retained in your estate may also mean a higher Inheritance Tax liability. But generosity needs planning. Is the money a gift or a loan? Can you afford to part with it? What happens if your circumstances change? And how does the arrangement affect your estate and your tax position?

In this first of two articles about financially supporting your adult children, we take a look at Wills, lifetime giving, giving from surplus income, mortgage repayments, school fees and loans. 

You can read the second article in this series here: 

https://www.ritchiephillips.co.uk/insights/how-to-financially-support-your-grown-up-children-part-2

Start with your own financial security

Before deciding how much to give and how to give it, establish what you have and what you need to retain. Retirement income, housing, living expenses, possible care costs and a reserve for the unexpected should all form part of that calculation.

The right amount is not necessarily the largest sum you can give away tax-efficiently. It is the amount you can give without compromising your own future.

Think about the purpose, too. Helping one child buy a home and another establish a business may involve different amounts at different times. Fairness does not always mean identical treatment, but clear intentions can prevent misunderstandings.

Make sure your Will reflects the plan

Lifetime help should sit alongside a Will that addresses what happens to your remaining estate. Without a Will, intestacy rules determine who inherits, and those rules may not reflect your family circumstances or your wishes.

If one child has already received substantial support, should that affect their eventual inheritance? If another owes you money, should the debt be repaid to your estate or forgiven on death?

A carefully drafted Will, supported by appropriate gift and loan records, helps your executors understand your intentions and reduces the scope for family disputes.

Lifetime gifts and the seven-year rule

Lifetime giving can be one of the most tax-efficient ways of supporting your children. Larger outright gifts to adult children are generally potentially exempt transfers (PETs). That means that provided you retain no benefit, they normally become exempt from Inheritance Tax if you survive seven years after making them.

If you die within seven years, tax is not automatically payable on the gift. Earlier gifts, exemptions and the available nil-rate band all affect the calculation. However, gifts can use up the nil-rate band, leaving less available against the estate. Where Inheritance Tax is payable on a gift, taper relief can reduce that tax if more than three years have passed.

Smaller exemptions can also help. The annual exemption allows £3,000 of gifts in total per tax year, with unused allowance carried forward for one year. Separate provisions cover gifts of up to £250 per recipient, subject to restrictions, and wedding or civil partnership gifts of up to £5,000 to a child or £2,500 to a grandchild.

Gifts are defined as:

• Money
• Property
• Possessions
• Shares

Loss in value when something is sold or transferred for less than market value

A gift can also include buying an item for someone that reduces your assets by the value of that item.

Giving from surplus income 

The ‘normal expenditure out of income’ exemption allows gifts from surplus income to be immediately exempt from Inheritance Tax, without a seven-year waiting period. To qualify, gifts must form part of the giver’s normal expenditure, come from income rather than capital, and leave enough income to maintain their usual standard of living.

There is no fixed monetary limit: the amount depends on the individual’s surplus income. Regular contributions towards a child’s mortgage or grandchildren’s school fees may qualify (see below).

Clear records are essential because the exemption is usually claimed after death. Keep details of income, living expenses, gifts and any commitment to future payments, so executors can demonstrate that the conditions were met.

A gift or a loan?

A gift transfers wealth without an obligation to repay it. A loan preserves your right to repayment. Before money changes hands, both generations need to understand which arrangement they are entering into.

For a loan, record the amount, repayment terms, any interest, whether security is required and what happens on death. Consider how the arrangement would work if the child’s business failed, their relationship ended or you unexpectedly needed the money back.

An outstanding loan is normally deemed to be an asset within the parent’s estate. Lending money to a child therefore does not generally achieve the same Inheritance Tax result as giving it away. However, the value of the loan remains fixed at the value of the original loan, and any increase in the value of the loan achieved by the borrower remains outside of the lender’s estate.

If you later decide to forgive the loan, that can constitute a gift and should be legally documented. An informal statement that repayment is no longer necessary may not effectively release the debt.

If there is a family trust, the trustees may be able to lend money to an adult child of the family if the trustees have the necessary powers to do so. However, there are tax implications, and the loan may result in an Inheritance Tax liability depending on the unique circumstances. Full financial advice should therefore be taken before this is considered.

Funding mortgage repayments 

Parents can repay all or part of their child’s mortgage. This gift is generally a potentially exempt transfer (PET) for Inheritance Tax purposes, becoming exempt if the parent survives seven years.

Regular gifts towards mortgage repayments may qualify for the ‘normal expenditure out of income’ exemption, without a seven-year wait. As explained above, they must form part of the parent’s normal expenditure, come from income rather than capital, and leave enough income to maintain their usual standard of living.

School fees and regular help from income

For parents whose income comfortably exceeds their spending, again, the normal expenditure out of income exemption can be particularly valuable. However, a substantial payment drawn from capital is not automatically covered merely because you can afford it.

Keep evidence of the intended pattern of giving and records of income, expenditure and payments. Your executors may need that information to substantiate the exemption.

In the second article in this series, we look at other ways you can support your adult children financially, including by gifting property, transferring a family business, using pensions and life insurance. And of course, we also take a look at the tax implications of doing so. 

This guide provides an overview only. It is intended as a general guide only. No action should be taken based on this guide alone. Please contact us before making any decisions or if you would like tailored advice.