Experts advise parents to consider how giving gifts and loans to their children might impact their own quality of life later on - skynesher/E+

The ‘Bank of Mum and Dad’ is a big business. Last year, gifts and loans from parents came to over £9.6bn, according to property firm Savills – with the money commonly being spent on house deposits.

The research, from May this year, found 173,500 first-time buyers were given assistance in 2024 – around half of the total number to have bought their first home – with gifts averaging £55,572 each.

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Parents stumping up large sums of cash is on the rise. The Bank of Mum and Dad (Bomad) has provided £38.5bn of assistance over the past four years, up 71pc compared to the previous four years.

Despite it being so commonplace, giving money to your children isn’t always straightforward. How much should you give? When should you give it? Could you end up accidentally landing your offspring with a tax bill?

Here, Telegraph Money answers these questions in a full guide to the Bank of Mum and Dad.

How much should you give your children? When should you give the money away? What do lenders need to know about a ‘Bomad’ deposit? Do children have to declare the gift to HMRC? What about inheritance tax?

How much should you give your children?

The golden rule here is that any contribution should be affordable – this means it will vary from person to person. Crucially, you need to ensure any gift won’t put your own retirement or financial stability at risk.

Laura Suter, personal finance director at AJ Bell, said: “It’s clearly nice to help out your kids, but you need to make sure you can afford it – and that you’re not going to impact your own quality of life by doing so.”

There can be a lot of social pressure now to help children financially, she adds, particularly if their friends are receiving significant handouts from their parents, but giving away more than you can afford can backfire.

Not only could you end up reducing your own quality of life – perhaps needing to call on your children for financial help in the future, which somewhat negates the point of giving them money in the first place – you could run into trouble if you’re left unable to pay for care costs.

Ms Suter added: “Many parents are making big sacrifices in their own lives to help out their children. While it’s understandable, it’s important they don’t do this at the expense of their own financial futures.”

When should you give the money away?

There are no hard and fast rules about gifting cash – many parents will wait until their child is in the process of buying a home before making a transfer. But you may find it’s better to give the money sooner rather than later.

“The earlier you can give money away, the better, from an inheritance tax planning point of view – in order to start the seven years it takes for funds to be outside of your estate for IHT purposes,” said Ashley Smith, chartered financial planner at SPF Private Clients.

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This can be more complicated if you have more than one child. You will need to give some thought as to whether all children will receive the same amount and if you’ll give the gifts at the same time.

One grandparent recently contacted Moral Money with a dilemma of wanting to give her granddaughter money for a house deposit without making her two younger grandchildren jealous. Our expert Sam Secomb suggested: “Rather than trying to make identical gifts at different moments in time, it might help to shift focus toward the principle of ‘equitable intention’, offering similar opportunities to each grandchild, even if the financial outlay isn’t exactly equal.”

Can I protect my deposit from my child’s spouse or partner?

Gifts can be simpler and avoid financial ties between a parent and child – but it does mean losing control over the money.

Loans, on the other hand, can offer more protection if you want to make sure your child’s partner doesn’t walk away with your money if they were to separate or get divorced.

Ms Davis said: “Loans must be clearly documented and could affect mortgage affordability assessments. In either case, legal contracts are advised.”

As a parent, you can also ask your child to sign a deed of trust if they’re buying with someone else. This details the money buyers have paid into a house deposit, ensuring they’ll receive the correct amount when it is sold.

Ms Davis added: “In some cases, placing funds in a lifetime trust or buying as ‘tenants in common’ helps protect the contribution.”

What do lenders need to know about a ‘Bomad’ deposit?

While a ‘Bomad’ deposit can be very helpful in helping a young person on the housing ladder, it does mean there are some extra hoops they’ll need to jump through during the purchasing process.

Jemma Davis, mortgage expert from Purplebricks Mortgages, said: “Lenders typically require a ‘Gifted Deposit Letter’ confirming the funds are a gift, not a loan – and that the giver has no interest in the property.”

Further, they will want to see proof of ID and bank statements showing the source of funds.

Ms Davis added: “Occasionally, lenders will require a ‘declaration of solvency’ from the gift-giver to ensure no undue financial pressure of future claims.”

Anti-money laundering checks will also take place.

In order to avoid any delays in the mortgage process, it’s a good idea to let your conveyancer know about the gifted deposit straight away and make sure the person who gave you the gift is available to fill out any required paperwork.

Do children have to declare the gift to HMRC?

As there’s no income tax due on gifted deposits, those receiving gifts from parents or grandparents do not need to declare them.

However, it is essential to keep good records of what gifting has taken place, as it will be needed for mortgage applications and future estate matters – more on this below.

What about inheritance tax?

Inheritance tax should be considered before any gifts are given to children or grandchildren. If you give more than your annual inheritance allowance (£3,000) or die within seven years of giving the gift, then the sum could be liable for inheritance tax.

“The general gift rule is that no tax is due on any gifts a parent gives if they live for seven years after giving them – unless the gift is part of a trust,” said Glenn Collins, head of technical and strategic engagement, at ACCA (Association of Chartered Certified Accountants).

“It’s best if the parent keeps a note of what was given and who it was given to, the value of the gift, and when it was given,” he added.

Ms Suter said: “You can also gift money through your regular income. The rules around this are generous but require careful consideration to avoid falling foul of them – along with strict document keeping.”

Are there alternatives to just giving cash?

If you don’t have much money to spare, there are other options you can consider to help your child on to the housing ladder.

Ms Daley said: “This ranges from gifted deposits and informal loans, to more structured solutions such as offset or guarantor mortgages.

“For those who want to go a step further, joint mortgages or ‘joint borrower, sole proprietor’ arrangements offer more flexibility, allowing parents to support without taking on ownership or extra tax exposure.”

However, bear in mind that if you take on responsibility for the payment of your child’s mortgage, it will put you on the hook if they fail to keep up with repayments – thereby putting your own home at risk.

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