My wife and I will turn 70 this year, making us think about inheritance. We worry about “intergenerational fairness” given that our two children, who are married and in their 30s, could benefit from financial assistance. We are considering providing money for property purchases and business ventures, but we don’t fully understand the ramifications, including how the tax system might help or hinder this. Any guidance would be greatly appreciated.
Paul Falvey, tax partner at accountancy and business advisory firm BDO, says recent research conducted by BDO suggests that you’re not alone in your thinking. Some 82 per cent of respondents to the firm’s survey (of mid-market business leaders) were keen to provide financial assistance to the younger generation.
The view on how best to assist was split, with 45 per cent of respondents preferring to loan or gift funds for a new business or career change, while 37 per cent would rather help fund a property purchase.
A sensible first step is to assess your own financial position to ensure that you’re not leaving yourself short in retirement. Start by working out what you can afford to give away — either as a lump sum or a regular gift. Then you can decide what would help your children most.
Providing money for a business venture should be done cautiously: if you don’t want to take on the financial risk of involvement in the business, a one-off cash gift may be best. The tax system can help in some ways: any gift given more than seven years before death is free of inheritance tax (IHT) and there is no tax payable by the recipient. Similarly, regular gifts out of your surplus income are also free of IHT, but they need to be documented properly.
There are more attractive options for a property purchase. Again, a simple cash gift may be best and can be particularly effective when the funds are used to help your children access other tax breaks — for example, contributing to a Lifetime Isa, where the government tops up the funds by up to £3,000 where they are used towards a first property purchase.
Another possibility is to make a loan to family members, although these can have tax consequences. Provided you have considered security issues and they are set up correctly, they can really help family members. Any interest you charge would be taxable on you and the capital would stay in your estate for IHT purposes as an asset — although you could write off the loan as a gift in your will.
Alternatively, some lenders now let parents use their cash deposits as security for a 100 per cent mortgage taken out by a child.
Finally, if your children are struggling financially, they probably aren’t putting enough into their pensions. Funding their pension contributions will also help them in the long run as well as providing some additional tax relief.
Additional information provided from BDO’s bimonthly Rethinking Tax survey of over 500 medium-sized businesses.
Can we keep our holiday home for our children now we’re separated?
My wife and I own a holiday home abroad but we have now separated. However, we both still want to keep the holiday home for our children. Is it worth implementing a timeshare agreement?
Iwona Durlak, family partner and co-founder of IMD Solicitors, says it is completely understandable that you want to keep a holiday home for your children when separating, even if you don’t wish to vacation together.
Providing security, certainty and consistency for children in this period of upheaval can go a long way in helping them come to terms with your separation. All too often a parental split can turn their children’s lives upside down and the strong emotions around your divorce can be compounded when their lifestyle has to change too.
Until a time when our children may inherit the property, opting for a private timeshare agreement can ensure you both retain ownership and use the holiday home fairly between you both (when visiting with the children or not). However, there are important considerations that may affect your ability to implement such an arrangement.
If there is consensus between you and your wife that you wish to implement a timeshare agreement (or put the holiday home into a trust for your children) it will still need to be thoroughly examined by the courts and won’t be automatically approved. For instance, if you agree on the timeshare, but not how to divide the rest of your assets, the court will review these and make a decision that ensures the needs of both of you are met from the matrimonial assets.
If there is not enough in the pot to cover income and capital requirements of the family, the court is unlikely to grant an order which would allow you both to keep a property for your children, and therefore you may have to sell the holiday home.
If you do agree on how most or all your assets should be divided — for example you may have a postnuptial or separation agreement — or you wish to agree a consent order, the court still has a statutory duty to consider factors applicable in determining the financial outcome when it comes to your divorce. This means a court won’t necessarily automatically approve a timeshare agreement for a holiday home. All in all it’s worth reviewing what your needs are and how that balances with the need of the holiday home.
You should consider seeking legal advice from the jurisdiction where the property is located before making any decision about arranging timeshares. Even if you finalise financial orders or consent orders in the UK, they will need to account for potential issues with enforceability in the jurisdiction of the property.
If you don’t own assets in the UK, but only abroad, depending on the circumstances it may be more appropriate to issue divorce proceedings or resolve the issue in respect of the property in that particular jurisdiction to finalise matters and ensure your agreement is recognised.
The opinions in this column are intended for general information purposes only and should not be used as a substitute for professional advice. The Financial Times Ltd and the authors are not responsible for any direct or indirect result arising from any reliance placed on replies, including any loss, and exclude liability to the full extent
Our next question
Both of my parents are not in the best of health and may require full-time care in the future. How can I prepare myself financially should both require care at the same time?
Do you have a financial dilemma that you’d like FT Money’s team of professional experts to look into? Email your problem in confidence to [email protected]