The property group, Savills, recently advised that around £30bn is expected to be gifted to first-time buyers in the next three years: an arrangement that they suggest benefited 164,000 such buyers in 2023.
The Bank of Mum and Dad may be a gifted deposit, or in some cases, it may be a soft loan – sometimes secured with the main lender’s consent and sometimes wholly unsecured.
In conversations with TWM clients, we see this cash help also extending to payments for elderly or social care and, topically, to private schools following the Labour government announcement of the indirect taxation on private school fees.
Family financial support is not a new phenomenon but is certainly a broader one: at a time when pandemic savers are now forced to be cost-of-living spenders there is an increasing reliance on older generations and the “Bank of Mum and Dad”.
Indeed, few expenses are more significant than those aimed at improving a child’s academic success or first steps to housing security. Here’s a closer look at how families are navigating these challenges and the legal considerations involved.
Labour’s VAT for private schools
With the previously available value added tax (VAT) reliefs on the tax status of private schools being squashed by the new Labour government (causing private school fees to soar even higher), many parents are taking proactive measures to secure their children’s education.
One strategy proffered by schools has been the advance payment of school fees, with school governing bodies suggesting that these programs not only mitigate the impact of VAT – which is to come into effect as early as January if the draft legislation proceeds in the current form published in July 2024 – but may also guard against future fee increases, with private school fees having risen by 8% this academic year alone, according to the Independent Schools Council.
This strategy has been met with some concern as to its efficacy, but the point remains that with private school fees averaging over £6,000 per term, paying upfront is a difficult task for many families. This is where the Bank of Mum and Dad, (or rather its next branch), the Bank of Grandparents, comes into play.
At TWM, we have seen a significant uptick in enquiries about intra-family loan agreements to manage the school fee burden.
The broader trend: the Bank of Family and the housing market
This shift towards advance payment of school fees is part of a larger trend where parents and grandparents play an increasingly vital role in the financial wellbeing of young people.
Perhaps the most notable area of this financial support is the housing market. Familial financial support reached unprecedented levels in 2023, aiding over 318,400 property purchases with £8.1bn in lending, according to Legal and General’s (L&G’s) “Bank of Family” report. This was up more than a quarter (27%) compared to 2019 pre-pandemic levels, while the value of the properties purchased was more than double the total from that year.
These levels of family lending are already staggering, and the trend is only expected to increase. L&G predicted intra-family support in the housing market will be worth £10bn in 2025, supporting 357,200 home purchases with a combined value of £147bn.
Legal implications and support
The trend of using family resources to hedge against future financial uncertainties highlights the need for legal expertise in these transactions – particularly where funds are expected to be repaid or tax implications come into play.
By formalising these arrangements in well-drafted loan agreements, families can ensure their financial support is both beneficial and secure.
It’s crucial to have a specialist prepare any lending documents to ensure they comply with Financial Conduct Authority regulations – failing to do so can render any lending subject to challenge or even bring a lender into the eyeline of the financial services regulator. Addressing these concerns upfront is better than risking legal issues later.
The proactive steps being taken by parents and other family members reflect a broader trend of intergenerational financial support that is reshaping the landscape of family finance.
With the right legal support, families can navigate our changing economy with confidence, securing their own financial futures and those of their loved ones.
