Getting the children started - golden rules
Background
Clients often ask the same questions, so here is a Noddy’s guide to this area. It is not advice, and nothing beats going to a competent lawyer.
There are many interconnected areas here, and some simple (as well as some not so simple) considerations. I concentrate on first property purchase, but clients will have different ideas of how much to help, at what age and in what form (gift/loan).
Golden rule 1 – don’t give what you can’t afford
The temptation to help your children is natural and for those with millions in the bank, this point can be ignored. But you need to consider a few “what if” scenario’s which may never happen, but could do so. These include for example a return to 98% income tax, a property crash (just when you were about to downsize), or that you need many years of old age care.
Golden rule 2 – ensure you achieve what you are setting out to do
A lot of parents think that by giving just graduated Jack or Jill £25,000 towards a property deposit, the problem is solved. Unless Jack or Jill have joined the family firm, the chances are that their earnings will justify a mortgage which – at best – ensures a property in an area you would not visit in daylight hours. Or they take on a mortgage which they cannot afford and in due course have to sell the property at a loss. It is better to offer nothing until you can afford to help to achieve the objective, not force them into the wrong decision.
On a similar basis, if your children don’t want to send their children to private/boarding school, let alone the school you attended, that is up to them. It is possible that they, rather than you, may be making the right choice.
Golden rule 3 – meet their objectives, not yours
Most people who own their homes assume that this is their children’s aspiration also. This may not be correct. From an investment perspective also, if your major asset is your home (which you children are likely to inherit one day), buying more of the same asset breaks one of my investment golden rules (eggs/baskets). There are (currently) tax advantages to buying your own home, but that presupposes profit.
I lose count of the number of clients expecting to downsize property when the children leave home. At retirement age, do you really want to downsize to a house/flat where your children (and grandchildren) can’t come and stay?
Conversely, it will often be far more useful to provide a smaller sum when your children need it, than 10 x the amount when you are dead. You might also obtain more pleasure from that.
Golden rule 4 – understand tax, but do not let the tax tail wag the investment dog
If you are to give money to your children, regular gifts may be more helpful than a one-off lump sum, depending on what the money is for. A cheque towards a house is perfect but for school fees, a commitment is more helpful.
From your own viewpoint, there may be further tax angles. As an example, if you are giving out of surplus income, inheritance tax exemption may be achieved after a couple of payments whereas one-off gifts will normally take 7 years.
Golden rule 5 – be fair to your children, and talk to them
You may decide to help one child to buy a property, with school fees or whatever, and not others – perhaps they don’t need your help, or don’t have children. It is up to you whether you adjust later provision (for example your Will) to reflect this.
Given increasing life expectancy, it is quite usual that by the time you die, some or all of your children will not want your money and may perhaps suggest leaving it to the next generation.
Golden rule 6 – trust the family, or the Chancellor, or the trustees
A major concern is that the children may waste the money you have given them, or your money may go on a divorce. Unless your assets are below the inheritance tax level, you need at some point to choose whom of the above you will trust. For many people, giving 40% (or more?) to the Chancellor when you die is worse than losing 50% (or more?) if there is a divorce. You can otherwise tie it all up with trustees and leave the problem to them.
Conclusion
This is a subjective area. In addition to the above, emotions can run very high in families when talking about money. We can advise you on finance, not family life.
EJA October 2018