Investing in your child’s business can be a rewarding yet complex decision for parents. While providing financial support can open up opportunities for tax planning and help kickstart a venture, it’s important to carefully consider the implications before making any commitments.

According to research by Charles Stanley, a significant number of new businesses receive initial funding from the founder’s parents or family trust. However, before jumping into an investment, parents should assess the potential impact on family dynamics and the risk of financial loss.

It’s crucial to approach the investment with caution and consider whether an outright gift might be a more suitable option. Not only does a gift eliminate the expectation of repayment, but it can also have inheritance tax planning benefits. By gifting money to your child, you can reduce your estate’s IHT liability in the future.

If you do decide to invest, it’s important to clarify whether it will be a loan or an equity stake in the business. Both options have their own set of considerations, including the impact on your estate for inheritance tax purposes. Proper documentation, such as a shareholder agreement or loan agreement, should be in place to protect both parties and outline the terms of the investment.

Investing in early-stage companies may also open up opportunities for tax breaks through enterprise investment schemes (EIS). However, parents may not be eligible for certain tax advantages due to their relationship with the company. It’s important to understand the limitations and seek advice from a financial planner or tax expert to navigate the tax implications.

Ultimately, the decision to invest in your child’s business should be made thoughtfully, considering the financial and emotional implications for both parties. By weighing the risks and benefits, parents can support their child’s entrepreneurial endeavors while safeguarding their own financial interests.