Often, clients will ask whether it is sensible for them to make an outright gift to their child, more often than not to help fund the purchase of a property.
The simplest option is often yes, to make an outright gift of cash to their child. No strings attached. The cash is theirs; and they can then use it as they wish.
Crucially however, once the cash is theirs, it forms part of their estate. Which in many cases can cause issues.
For example, what happens if the child is newly married, but unfortunately the relationship breaks down and divorce looms. The cash gift they have received suddenly forms part of their matrimonial assets and potentially will be split as part of the divorce.
Alternatively, what happens if the child has recently setup a business, but unfortunately the business hits financial difficulties and bankruptcy looks. The cash gift they have received could potentially become the target of an insolvency practitioner looking to recover assets.
Whilst these may seem unlikely risks, they do happen and more often than you would probably think.
For clients who are thinking about making a gift to their child but are concerned about the risks of what happens once the cash becomes theirs, then there can be alternatives worth considering.
A few alternatives to consider might be:
- A ‘soft loan’, i.e. entering into a loan agreement that documents the cash is due back to the client at some point in time. Straight forward, but open to the argument that the loan was never really intended to be repaid and should therefore be ignored.
- A ‘hard loan’, i.e. entering into a loan agreement, but securing repayment of the loan over a property owned by their child. More complicated that a soft loan, but also more likely to be successful in securing repayment if needed.
- A ‘gift into Trust, with the Trustees then making a soft loan or a hard loan‘. An option to be considered if the client wants to make a gift that is effective for their own IHT planning, but also has the benefits that come from loaning the cash rather than making an outright gift.
Finally, how much is being gifted and to what extent IHT planning is an issue will impact the most suitable option.
Whilst not wanting to overcomplicate things, quite often an outright gift is not the best option and so talking through the alternatives can be of huge advantage.
