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Helping the Next Generation - Planning for the Future

As we start to look ahead after a turbulent 18 months, families are wanting to put plans in place for the future. The pandemic provided some with the time to reflect on their financial circumstances and consider their next steps. Whether that be looking to help children or grandchildren with a house deposit or helping to pay for grandchildren’s school fees, it is important to consider these decisions from a family law perspective, as well as seeking the necessary financial and legal advice.

Making a one off or regular loan or gift to help out a family member may seem a simple and straightforward thing to do. However, it can bring with it complexities that may not be envisaged at the time. The family member providing the gift or loan should consider the impact on their own financial affairs, as the arrangement could have unexpected tax consequences.  

A gift or loan should also be considered from the perspective of the family member who is going to receive it. Are they married or in a relationship? Do they intend to get married or are they perhaps looking to separate from a partner. Is the gift or loan intended to be given to and for the benefit of just the family member or their partner or spouse as well? If it is a loan what are the conditions for repayment?

It is not just financial help that needs to be looked into but also the wider context. The nature of the recipient’s relationship may give rise to unexpected consequences if the relationship later breaks down. Some examples of scenarios to consider are set out below.

  • Getting a family member onto the property ladder - Family members may want to help out the next generation by providing a deposit for a property to enable them to buy their first or a bigger home. Not only are there usually specific requirements by mortgage lenders (they may specify the money must be provided as a gift instead of a loan), it can also have consequences for the family member receiving the gift if their relationship later breaks down. Money from family which is invested into a property owned jointly by a couple may need to be protected from this scenario. For example, this money may need to be expressly ‘ring-fenced’ in a declaration of trust, a cohabitation agreement or a nuptial agreement depending on the circumstances. If they are married, putting money into a jointly owned family home may not be the most sensible step.
  • Helping out a family member with expenses - If family are looking to help out with living costs or legal costs following a relationship breakdown, this may become the subject of arguments as to whether it is in fact a ‘soft’ loan which is not really expected to be repaid. The regular payment could also establish a pattern of support which may also be argued relevant to the separation of the couples’ finances. If the money is in fact intended to be a loan which will need to be repaid, a professional loan agreement with specific terms should be drawn up and entered into before the loan is paid across to provide clarity on the arrangement.
  • Helping out with school fees - Another common example is where grandparents or family members want to help out with private school fees. Thinking about the best way to structure this arrangement could be extremely useful further down the line. For example, is setting up a trust the right vehicle for doing so to protect the money and to make sure it is there to pay for the duration of their education. Alternatively, should a separate account be set up with limited access for payment of those school fees only. Are the fees intended to be repaid, or are they time limited?
  • Succession planning for a family business - Before the next generation are introduced into management or ownership, should there be a condition that a relationship agreement is entered into to try to protect the business for the family in the future if a joining member is married or will be married. Should shares or an interest in the business be provided only to the family member and not their partner or spouse in case of a potential conflict further down the line. Similarly, this should be a relevant consideration when deciding who the beneficiaries or class of beneficiaries should be in relation to a trust or shareholding.
  • Passing on early inheritance - Passing on funds to future generations can be a great thing to do from personal inheritance tax planning, but it is important to think about the consequences if the individual is in a relationship or could be in the future. Gifts paid during your lifetime, will become assets in your child or grandchild’s own right, and so if they are married then this asset will need to be disclosed and may need to be used to meet needs if their relationship later broke down. Think carefully before paying off a joint mortgage, and consider whether there may be other options to help out instead. Whatever is paid to a family member, they should think about keeping this separately and in their own name, rather than mingling this with joint resources.

Take advice before acting

Whatever the situation, seeking early specialist advice will prevent any unnecessary and unexpected surprises. Financial, tax, succession planning and family law advice could all help shape any such decisions with suitable protections put in place for the future.

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