The bank of mam and dad is free money – money that grows on trees. The never-ending ATM cash extraction, where you don’t even need to use a card. It was amazing to read that one in five Irish households are millionaires. When I looked in the mirror the other morning, I didn’t see a millionaire staring back at me, but a man who
“got bills I gotta pay, so I’m gon’ work, work every day”
But things get real when your kids get older and need a helping hand. It’s no longer Man Utd kits, nice dresses, and 99’s, but college fees, rent, and house deposits. With soaring house prices, getting one foot on the property ladder is difficult. This is where the bank of mam and dad can help. Let’s look at the following points to give you more insight into how this works.
- Mam & Dad
- Bonny & Clyde
- Down the line
- Summary
Mam and Dad
Mam and Dad are Jane and Dick. They have two kids, Bonny and Clyde. Before giving all their money away, they need to make sure they have enough money themselves. To live comfortably, to go on holiday, and to change the car without borrowing. One of the main concerns for Dick and Jane is running out of money. Two state pensions alone give them €30,000 of Income per annum. Dick has a work pension of €20,000 and Jane does some part-time work that brings in €10,000 a year.
That’s good income provided there is no mortgage and other loans to service. Plus, apart from Jane’s €10,000, the income is guaranteed. Plenty to live off, but you wouldn’t be going wild either. They have €250,000 in savings, and their home is worth €450,000. The plan is to eventually sell the home and move into town to be closer to the shops and services they need. Jane will inherit her dad’s house when the time comes. Old Bill is 94 now and is flying it. That house is worth €350,000
Protect themselves
If Dick and Jane are sitting in front of me, my key message to them is to protect themselves. They need to be comfortable with what they give away and hold onto enough money in the event of an emergency. My view is that they could gift up to €50,000 each to the kids and hold onto €150,000. That would give them €30,000 a year for 5 years if the worst happened, like a nursing home need. Their current income is enough to live on, and they don’t eat into savings.
When Jane inherits the house from her dad, she won’t pay any inheritance tax on that if it’s worth less than €400,000. Let’s assume it’s worth that. She can either sell it or rent it. If she sells it, she’ll clear €400,000, and if she rents it, their income will increase by about €20,000 a year. That would put them in a very comfortable position, and they’d be open to gifting more then.
Gift now or on death
Are we better to gift now or on death? Dick throws this question out there. My view is now, if that’s possible, and it doesn’t leave you in a difficult financial position. But why now, and not later? The simple answer is that the greatest need for money is when you are trying to get on the property ladder. Role on 30 years, Dick and Jane will either be dead or in their 90s. And Bonny and Clyde will be in their late 50s.
That’s the time they should be coming out of their mortgages and have fewer bills with their own kids growing up. Their kids could be looking for a leg up the ladder at that stage! As a result, the money is more valuable to them when the need is at its greatest. So, if you can afford to give it to them now, then your kids are in a very fortunate position.
I’ve seen this with some of our clients. A few have given their kids enough money for a large deposit. This has helped their kids greatly in a couple of ways.
- It helped them get on the property ladder in the first place
- The mortgage that the child has is more affordable. The children aren’t burdened by a massive debt and have to use a large part of their income every month to pay it
Bonny & Clyde
Clyde is 27 and works in IT for a US Tech company. He’s single and working and living in Dublin. Bonny is 25 and is a teacher. She’s been going out with Duncan for 5 years, who is a farmer.
Clyde’s position
Clyde is fed up with renting, as he pays €2,000 a month in a not very plush area. He’d love to buy an apartment in Clontarf. Next to the sea and on the Dart line, it ticks a lot of boxes for him. He saw a gorgeous two-bedroom new build apartment for €450,000 on Daft. His salary is €90,000 per annum, and he can get up to 4 times that as a mortgage. He’ll apply for the Help-to-Buy scheme as he’s a first-time buyer. If he gets that, the price will drop to €420,000.
He has €20,000 in savings. A mortgage of €360,000 and his savings still leave him short €40,000 off the magic €420,000 number. A gift of €50,000 from his parents would sort out the problem for Clyde. Not only would it cover the difference, but the extra €10,000 will help pay legal fees and stamp duty at 1% [€4,500]. His repayments on a 30-year mortgage would be €1,775 a month. For a 25-year mortgage, the repayment would be €1,905 a month.
Both repayments are lower than his existing rent. In the first few years, he intends to rent the other room to his friend for €1,000 a month. He is aware of the rent-a-room-relief scheme, so he won’t pay any tax on the income. It will be a massive help towards the mortgage to make his repayment less than 50% of what he is paying in rent.
If Clyde is short of money to furnish the apartment, his parents could loan him €10,000. A suggestion would be to repay the loan at €1,000 a month. This would come from the rent his friend is paying him. Dick and Jane need to be clear with Clyde that it is a loan and set strict repayment terms, so they all agree.
Bonny’s situation
Bonny and Duncan recently got engaged. There is a beautiful half-acre site on Duncan’s parents’ farm that they will gift to him. A local builder priced a very nice home for them for €500,000. Frank had a look at the plans and called it the “James Bond” house. Duncan’s salary from the farming company, which his dad owns, is €60,000, while Bonny is on €45,000.
Again, they will go for the help-to-buy scheme and hope to get the full €30,000 from that. They have combined savings of €40,000. That would leave them with a mortgage need of €430,000. They can get up to €420,000 but would prefer a lower amount. A gift of €50,000 from her parents will reduce the mortgage amount to €380,000. The monthly repayment over 25 years is coming to €2,060. Over 30 years, the repayment is €1,870. While not cheap, it is affordable given their existing salaries. As it will take over a year to build, they think they could save another €10,000 and reduce the mortgage they need.
Down the line
We are now 5 years down the line. Jane’s Dad passed away, and she inherited the family home. She sold it for €450,000 and cleared €430,000 after tax and costs. Dick and Jane decided they would gift each child €1,000 per month for the next 5 years from the sales proceeds. Over the next 5 years, it will cost them €120,000.
Clyde met his girlfriend Natalia two years ago, and she moved into his apartment. The friend moved out. They are getting married at the end of 2030. From 1 January 2031 Dick and Jane set up a monthly direct debit transferring €1,000 a month to Duncan and Bonny. And they also transfer €1,000 a month to Clyde and Natalia.
This €1,000 a month doesn’t eat into the parent-child Group A threshold and is a huge help to both children. With the small-gift-exemption, they can give up to €12,000 to each couple being
| From Jane to Clyde | €3,000 |
| From Dick to Clyde | €3,000 |
| From Jane to Natalia | €3,000 |
| From Dick to Natalia | €3,000 |
| From Jane to Bonny | €3,000 |
| From Dick to Bonny | €3,000 |
| From Jane to Duncan | €3,000 |
| From Dick to Duncan | €3,000 |
| Total | €24,000 |
It works for Dick and Jane too. They set aside €120,000 from the house sale but hold onto €310,000. Their existing savings of €140,000 increase to €450,000.
Summary
There is no doubt that Dick and Jane and their kids are in a fortunate position. The parents have a super attitude and want to help their kids now. That is way better for the kids rather than leaving everything to them when they die.
The parents have protected themselves by not giving all their savings away. Plus, when they get more down the line, they give more but still hold onto a nice nest egg. By availing of the small gift exemption for 5 years, they get a further €60,000 to each child. If they feel comfortable doing that, they can continue the arrangement beyond 5 years. So, the €120,000 over 5 years could double to €240,000 over ten years or €360,000 over 15 years. These funds can come from the existing savings they have. They can replenish those funds if they downsize.
Availing of the small gift exemption protects the existing parent-child threshold. That threshold is now €400,000, and both kids have only used €44,000 of that [€50,000 less gifts of €3,000 from each parent]. The bank of mam and dad has been a massive help to get onto the property ladder for Bonny and Clyde. I hope they appreciate their parents’ forward thinking. If you are in a position that isn’t as fortunate as them, the first home scheme could help to bridge the gap
Do you need help passing on family wealth? If so, start here
