There’s little doubt that financial planning for later life has become more complex. Returns from savings are at record lows and pensions are not the reliable source of retirement income they once were. As life expectancy increases there’s also the potential for high care costs to consider.
The growth of the ‘bank of mum and dad’ is another factor. Research by Legal and General and the Centre for Economics and Business Research estimates that £6.5bn will be lent by parents and family members this year to help the next generation onto the property ladder. Most of the cash goes to fund deposits rather than repayments.
Digging into savings, or possibly remortgaging to release equity to loan or gift to your children, probably wasn’t in the financial plan you had a few years ago. Statistics show that the bank of mum and dad generally receives no interest on the loans it provides.
Low savings returns and annuity rates are also prompting people to invest in the property market as part of their retirement planning.
All of these decisions have implications that you need to be aware of.
Multi-generational purchases certainly have issues depending on whether the money is a gift or a loan. Gifts could have Inheritance Tax implications. If you are lending or gifting the money you need to think about what would happen if your son or daughter separates from their partner or defaulted on the mortgage. A deed of trust could protect everyone’s interests.
Some people choose to formalise the arrangement so that parents have an option to recover the money should things go wrong. Be aware that if the money is ‘repayable on demand’ and you are made bankrupt, your creditors could well call on your children. At the very least there needs to be a clear understanding on all sides whether the money is a gift or a loan; this is not something you want to establish later in court.
The main mortgage lender will possibly also want reassurance that you have no financial interest in the property, despite funding the deposit.
If you plan to buy a property as an investment you need to understand the implications of additional Stamp Duty on second homes and your exposure to Capital Gains Tax if you sell. Alongside this you have to think about your longer term financial needs. Continuous growth in property values isn’t a certainty. There could be more secure opportunities for wealth generation that you should explore.
It’s probably never been more important for the over 50s to get sound wealth management, financial and legal advice on property law & investments.
The Powells Law team will help you make better informed decisions. You can then protect your assets, maximise retirement income and help your children with minimum risk. Call us on 01934 623 501.