Q Today’s 30-somethings risk being poorer than their parents. In our quest to avoid impoverishing our children, we’re helping them get on the property ladder. We recall a case in the news a while back of a couple who spent £380,000 in legal fees in their attempt to prevent their estranged daughter-in-law walking off with half the cash they’d given their son to buy a house. How can we prevent such an ugly episode in our family? In short can we use a trust to avoid inheritance tax and other nasties?
P.S. The polite way to describe our son-in-law is ‘unreliable’.
A Early in my career, when dinosaurs still roamed the earth and the globe was cooling, I was a generalist financial adviser, which means I arranged the odd mortgage. One day, a query crossed my desk – a county court judgement had ensnared this fellow’s mortgage quest. His mother had dragged him to court. To my up-till-then sheltered self, while it was not my belief that all families’ affairs were as boring as a manila envelope taped to a beige wall, this manner of washing one’s family linen in public was so unconscionable to me that I therefore turned the case away without speaking to the applicant.
The Times
Credit to Bob Dylan: The times, they are a-changin’. I stumbled upon some intelligence the other day – about a threefold increase in the number of court cases consequent upon older folk seeking to recover monies they’d advanced to their offspring.
The case in your question is notable for the elders’ failure. They failed to convince the court the money in question was an investment in the property and not a gift. They thus were bound to pay additionally, the young(er) lady’s legal fees. I’m too well brought up to comment on the parents-in-law’s motivations.
Irrespective of the enthusiasm with which we accept the assignment, we’re cartographers and stenographers of human nature. Passions might cool and affections may wane. When this happens the prophylactic to being injured by the other party financially is documentation. In short, write everything down.
You Decide
Decide at the outset if the cash being handed over is a loan or a gift. There’s no call for pleonasm or prolixity – we use ordinary language, so we use words an 11-year-old would understand.
A gift is given absolutely, without consideration or expectation of anything in return.
When you arrange a loan it is with a view to repayment.
Personally, I have always considered a loan from one’s parents to be interest free and ne’er to be repaid – a gift by another name. I’ve recognised my bias – it’s one’s private soul leaking out.
The redundancy of spelling this out borders on the embarrassing, but sometimes the first duty of the intelligent is the restatement of the obvious: no one size fits all.
The choice of a loan or a gift is a matter for another day.
Nonetheless, loan or gift, write it down. Properly and formally.
Use a Trust to Avoid Inheritance Tax
If it’s a gift, give it away now. You might have heard of the inheritance tax seven-year rule. If you survive the gift by seven years, then no inheritance tax is payable on the gift.
Gift or loan, the older couple of your question might have avoided this court case if they’d used an appropriate trust. As you know, a trust, in its simplest form, separates the ownership and management of an asset on the one hand from its enjoyment on the other. They could have placed their alleged investment in a trust of which their son was the beneficiary, and saved themselves mountains of costly nonsense.
Bonus, it would also have prevented future generations of their family from liability to inheritance tax forever.
That, is how the rich have remained rich.
