Headlines about the Bank of Mum and Dad are a recurrent theme in the press. Indeed, research shows that 57% of homeowners under the age of 35 received help from family or friends to buy the property they live in. Meanwhile, banks and building societies launch products encouraging parents to use their own funds as collateral for their child's mortgage.
Today's millennials look at their parents with envy as the generation who had it easy. While no one would deny that young people today face a tougher struggle to reach the first rung of the housing ladder then previous generations, there is now the presumption that parents will help. Sometimes, parents will even sell the family home and downsize to release capital for their children. But are these parents adequately equipped to fund their retirement at a time when life expectancy is at an all time high but pensions funds are suffering from poor returns thanks to low interest rates.
Has society not gone mad? Is this not about a change in values - the National Health Service attitude that everything will be provided for free? What happened to the values of hard work and responsibility for one's own destiny?
While it is true that my generation, the baby boomers, were typically able to buy their first property in their 20's, younger than their own children, expectations have also changed. For us, to buy a modest flat in the capital two incomes were needed, sacrifices were made and there was no expectation, dare I say presumption, that parents would help.
We went through periods of enormous uncertainty, two major recessions, spiralling interest rates with mortgage interest rate up to 15% and now suffer from a near zero lack of return on investments to fund our retirement. In sharp contrast to the millennials, we also had a "make-do" attitude whereas today's young expect a designer flat with all the mod cons and gym facilities.
So what are the implications when a parent helps a child?
The Do-Gooding Parent
The parent wants to feel they are being generous and avoid inheritance tax, so they transfer the holiday cottage/villa in Spain to the child. The child now becomes a first time home owner so if they do get into a position where they are able to buy a first home they will liable to pay a 3% second home stamp duty land tax surcharge. In London this surcharge could run into a five figure sum. Capital gains tax issues can also come into play and the transfer of the cottage/villa may not work for inheritance tax purposes if the parents continue to use the cottage/villa.
The Indulgent Father
The father decides to fund the purchase of his soon to be married daughter's first home even though he has reservations about his future son-in-law. The marriage subsequently breaks down and the father is then surprised that the property is taken into account as an asset during the divorce. The moral of the story is that you cannot give something away and expect to control it. Some protection can be given by the daughter making a pre nuptial agreement before the marriage but the father cannot dictate the terms.
A better option for the parent to protect the fund (but does not work for inheritance tax planning) is to lend the money, but even then, the fact that the daughter has a loan is likely to be taken into account on a divorce and the court will frequently take a view that it will not be repaid to dad, so any other capital is spilt in favour of the husband.
The Kind but Foolish Parent
Most parents will do whatever they can to give their children the best start from moving to a catchment area for an Ofsted outstanding school or moving out of a prime residential area to release funds for school fees. These parents may then go on to help with university fees and the purchase of a child's first flat.
In a country where the average pension fund is under £100K, the time bomb is ticking. A £100,000 fund will give a £25,000 cash fee lump sum and about £5,000 a year pension. Add to this the state pension of about £6,000 a year (or about £12,000 for a couple), many baby boomers will be living on about £11,000 a year, or about £17,000 for a couple, in retirement. The average expenditure in retirement is about £24,000 a year. With this in mind, the parent cannot afford to help a child and while they are doing so with good intentions, they are arguably acting in an irresponsible manner if they are then forced to turn to the child for help at a later stage.
So perhaps we should look to certain celebrities such as Nigella Lawson & Sting who have both stated that they do not intend to leave the majority of their fortunes to their offspring in the hope that they can instil in them a strong work ethic and protect them from the trappings of wealth.
Indeed, perhaps the wisest lesson for all parents, whatever their age or stage in life, is to balance their own needs with the welfare of their children.
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