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The bank of mum and dad - the future of property finance?

View profile for Sarah Banner
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This week, the Resolution Foundation published its report entitled “The generation of wealth: asset accumulation across and within cohorts” which looks at wealth, trends in wealth distribution and how that translates through generations and what the financial landscape may look like for future generations.

What interested me the most within the report was the idea that wealth in general is accumulated passively, ie, not from active savings activity but more from the combined impacts of the property market over time and low interest rates.

The report talks about ‘cohorts’ – identifying specific groups of adults in categories like the baby-boomers, generation X and millennials – drawing the conclusion that, over the past years, passive changes have provided the most benefit and growth in wealth to those within the category of baby-boomers. But worryingly, stating that, the often talked about millennials and younger generations stand less and less of a chance of enjoying the benefit of such passive changes like the property market, because they themselves are typically spending more time renting property, unable to secure deposits for properties themselves. The report states that the growing disparity between generations is compounded by the large rents being paid to the baby-boomer generation from those renting millennials – stated to be £4 billion in rent per annum for the period 2012-2014.

Whilst an interesting read, what does this report mean in real terms and why is it relevant for me as a private client lawyer? We are increasingly called upon by parents, grandparents and elder relatives to advise how to structure gifts to family members with the specific aim of purchasing a first home. It often seems like a simple solution – the bank of mum and dad! But as with many things this kind of arrangement deserves further consideration – are you planning on giving the money or is it a loan? If it’s a loan, is there interest to pay and how have you recorded that arrangement? Is there a mortgage planned for the balance of the purchase monies and, if so, is the lender aware of this additional loan? If you are making a gift, have you considered protecting the recipient from the possibility of relationship breakdown or financial difficulties? Lots of questions to consider. As the person making the loan, have you considered the impact on your own tax position? Are you sure that you can afford to lend or give capital away and what if you need the money later on in life? Whilst your generosity may be very welcomed by the younger generation, you may want to consider what your needs will be in retirement, and whether you should be planning to fund your own care in later life.

Members of Roythornes' Private Client team are experts in estate and tax planning and experienced in working with families to achieve distribution of family wealth. Our team can advise you on making gifts, property purchases, your buy-to-let portfolio and the tax implications for you.

 

 

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