If you’re in the fortunate position to be able to help family members financially, you’re probably thinking about the best way to go about it.
Money is a sensitive topic to begin with. In our recent survey on family and finances, we discovered 56% of the people we asked were embarrassed to ask family for financial help. On top of money being an awkward subject, there are many other considerations to be made from tax obligations to fair share between family members. But fortunately, there are ways to gift money to your loved ones that will make the whole process a lot easier and less stressful.
Keep reading to find out how to gift money to family or friends, what the tax implications are, and discover simple tips that make life easier, including talking to an advisor.
How to gift money
Not many of us are used to talking about money. Recent research shows 62% of parents would welcome guidance on how to make gifts and loans. As inexperienced as we may be in broaching the subject, having a good conversation beforehand is key to making sure everyone is on the same page and taken care of. Here is a simple step-by-step process to get you started:
Get prepared
First, get your thoughts organised by writing down a list of all the things you wish to discuss with your family member or friend. Planning out the conversation beforehand is important, especially if your financial gift is substantial, there are conditions you want to put forward, or just in case the conversation gets emotional. In any case, you’ll have a road map to help guide the conversation in the right direction.
Here are a few things to think about when giving money as a gift:
- How much money do they need and how much can you gift?
- Will your financial gift be a recurring arrangement or is it a one-off?
- What conditions, if any, do you want to put forward?
- What should happen if your relationship breaks down for whatever reason?
- What should happen if either one of you have a change in your financial circumstances later on?
Choose the right place and time
The setting is very important for a successful conversation. Find a quiet place where you are unlikely to be interrupted and make sure there is plenty of time available for an in-depth discussion. There is nothing worse than being rushed to finish off such an important conversation.
Make it clear whether it’s a money gift or a loan
It may seem obvious to you, but it’s always better to make things clear. Whether you’re expecting to receive the money back at some point or it’s a cash gift with no strings attached, spell it out so everyone is on the same page and there won’t be any confusion later on.
Prepare the terms and conditions
Due to the personal relationship, many people think that it’s not necessary to draw up family loan agreements or conditions for a cash gift. However, this is one of the most important things you can do to avoid confusion and even possibly conflict. Find out more about how to establish the ground rules with our guide on terms and conditions for lending money to family.
Be honest about concerns
There are considerations to be made on both sides of the conversation. Be open when it comes to your own concerns, but don’t forget to put yourself in your loved one’s shoes as well. Here are two handy articles that will help you see the big picture, from both perspectives: gifting money to family, but also what worries exist when asking family for money.
Consider the tax implications
Tax may apply to a financial gift, so make sure you take inheritance tax rules into consideration when planning out a financial gift for your loved ones. Different rules apply to different family members and how much you give them is as important as when the cash gift is given. We put together an easy guide to help you find out how much you can gift per year and what the potential tax liabilities are. Read more in our article about tax inheritance rules.
Keep notes
Lastly, don’t forget to write down the important points that have come up during the conversation. This will help both of you, in case you want to revisit the details of your agreement or want to change them later on.
Types of cash gifts
Different considerations need to be made depending on what the financial gift is for. Here is how to gift money in various circumstances:
Weddings
It’s always been the tradition for the bride’s family to pay for the wedding, but times have changed and parents shouldn’t feel pressured into footing the substantial bill that comes with their children getting married. However, if you do want your cash gift to go towards the happy event, make sure you are open and clear if there are any conditions that will apply to avoid misunderstandings. If you want to be involved and help with the wedding planning, let your family know as well.
Keep in mind that how much you can gift at a wedding also has tax implications. Depending on your relationship, you can give money tax-free up to a certain amount:
- Parents can give up to £5,000
- Grandparents can give up to £2,500
- Other friends and family members can give up to £1,000
Always speak to a financial adviser about your specific financial and tax situation.
House deposit
One of the most common ways to give money as a gift is towards helping your family members get on the property ladder. A recent report by the London School of Economics found that the Bank of Mum and Dad is the sixth biggest mortgage lender in the country, with over £6 billion being gifted from parents to children across UK last year.
Even though giving money to children is common practice, it’s still a topic many parents find difficult to approach. The best thing to do is making sure you have an honest conversation about how much money they need, how much you can offer and if it’s a loan, what interest you want to charge. The conversation might seem like a business meeting instead of a family get-together, but remember the aim is to reassure everyone involved that their needs are taken care of.
Another important decision to make when it comes to offering a financial gift for a house deposit is what should happen if the house gets sold at some point in the future. Keep a record of the conversation to make everyone’s life easier in case there is confusion later on down the line.
Find out more about gifting money for a house deposit with our easy-to-follow guide.
Buying a car
If you want to help a loved one pay for a big purchase like a car, there are a few ways to give money as a gift to help out. One option is to provide a financial gift that goes towards paying for the car itself. But don’t forget there will be other expenses that come with owning a vehicle, including insurance, maintenance and fuel. Depending on the circumstances, a better arrangement could be a recurring monthly payment that helps them with the on-going costs of car ownership. Discuss all the options with your family member to make sure you’re choosing the best solution for their needs.
Education
With tuition fees on the rise and expensive costs of living, parents and grandparents will often want to help their younger family members to get the best possible start in life by offering a financial gift for attending university. Many parents have already planned ahead and started saving early on, so when the time comes, they’re financially ready to offer their support.
Even if you plan to offer your children or grandchildren a financial gift towards going to university, it’s important to know all the money options they’ve got available, including university loans, government loans and government grants. University comes with hefty bills, so if you feel like you might not be able to support your young family members by yourself, consider asking other family members to contribute, either with a loan or a money gift. They are likely to be excited to help. In case you are not sure how to broach the topic, we put together a few handy tips in our article Receiving money gifts from parents and other family members.
The importance of talking to an adviser when giving a financial gift
Whether you want to give money as a gift or as a loan, to a family member or a friend, it’s important to consider talking to an adviser first. Contact them early on as you start thinking about how to gift money and discuss openly how you wish to proceed. Professional advice is key in making sure you are taking care of the loved ones to the best of your financial ability, while looking after yourself as well. Here are a few questions a financial adviser will help answer:
- How much can you afford to give?
- How much you will lose out in interest on savings?
- Can you afford to give the money as a gift, or is offering a loan a better option?
- What to include in a loan agreement?
- How much can you gift before you start paying inheritance taxes?
- What are the tax liabilities for everyone involved?
If possible, ask the family member or friend you’re trying to help to join in as well. The more open the conversation, the easier will be to plan out a financial gift that offers the maximum benefits to you and your loved ones. Plus, you’ll have peace of mind talking to a knowledgeable specialist offering you their best advice.
In conclusion, if you’re thinking about how to gift money, how much money to gift and how to navigate the money conversation in a successful way, the key is to be prepared, open and clear to avoid misunderstandings. Add the professional help of an advisor on top of it and you’ve got a bulletproof strategy that offers your family the support they need in the least stressful way possible.
Next, find out how to gift money tax-free and how to avoid hefty tax bills by planning things in advance.
This article is correct at time of publishing and for general information purposes only. We recommend you speak to a professional financial adviser for advice. You can find a financial adviser and further personal finance information at unbiased.co.uk.