Your Money: Is the Bank of Mum and Dad being emptied out?

MANY young people rely on the Bank of Mum and Dad.

It offers a helping hand through university, on to the housing ladder and even with everyday bills.

But just how vital is it – and what potential pitfalls should parents consider before opening a branch?

Helen Morrissey, personal finance specialist at Royal London, says: “Parents must ensure they are aware of the potential tax implications, and consider that giving away or lending a large sum could affect them further down the line if their circumstances change.

“Arguments over whether money needs to be repaid, or over what time period, have the potential to cause considerable harm to the parent/child relationship.”

Here are five sticking points set out by Royal London:

Is the money a loan or a gift?

Disputes can occur if parents and children have differing ideas.

Tax

Understand the possible tax implications of being named on the deeds of a property bought with a child.

Future financial hardship

Parents can hand over what they believe is an affordable amount, only to find their own circumstances change due to redundancy or ill health and they are short of money. Similarly, children may initially be able to make repayments but struggle to do so once they have children or face unemployment or work absence due to sickness.

Potential falls in house prices

Mums and dads might have to sell a property in the event of a housing market downturn. If the property is in negative equity, they may not see their money returned when they expected.

Relationship changes

Parents should consider what would happen if their son or daughter forms a new relationship or an existing one breaks down. Could there be a dispute about how much of the house is owned by each party?