Protecting the Bank of Mum & Dad
According to a survey by Legal & General, the unofficial lending institution known as the bank of Mum & Dad will have helped more than 300,000 first time buyers to get on the property ladder in 2016, with parents lending an average of £17,500 towards their child’s first purchase. For many families the parents will be downsizing their own accommodation to make funds available to assist their children.
This gives rise to a number of legal issues, particularly if the child is buying with a partner or decides to marry in the future. Whilst parents are keen to help their children onto the property ladder, and from personal experience I’d say to reclaim their homes for themselves too, they are not so keen to see their hard earned cash benefiting a third party. Whether parents approve of their offspring’s choice of partner or not, very few want to simply hand over cash which may not stay in the hands of family members.
Parents making contributions need to think about protecting their investment, which can lead to all sorts of legal complications and some difficult family conversations. Let’s consider some common examples.
Johnny is buying his first flat with the assistance of a mortgage. The deposit is being provided by his parents. Johnny is buying the flat in his sole name but he has a steady girlfriend and they are discussing moving in together. The first point to make is that the deposit from his parents will need to be disclosed to the mortgage lender. Most lenders don’t like lending if it is intended the deposit is a loan, so this may present a problem in Johnny raising the mortgage. Johnny’s parents don’t expect to be repaid their investment and are happy to confirm it is a gift but are worried about Johnny’s girlfriend being able to claim part of the money if their relationship fails. In these circumstances Johnny could ask his girlfriend to enter into a living together agreement to set out the basis on which they are going to co-habit. Their agreement could set out what contributions they will each make to the household, what, if any, interest Johnny’s girlfriend will have in the property and how the initial deposit from his parents will be treated.
Mandy and Jack have been living together in rented accommodation which is costing them more in rent than a mortgage would. Mandy’s Dad offers to gift Mandy sufficient money to provide a deposit on a small house. In this case the house will be in joint names as this is the only way Mandy and Jack can raise a sufficient mortgage. Mandy and Jack could have a declaration of trust which sets out how they each own the property taking account of the money gifted to Mandy by her Dad.
There is a real distinction to be drawn in cases where the young couple will be living together and where they are married or intend to marry. Currently in England and Wales, couples who live together have no financial obligation towards one another, therefore any dispute over ownership of property is dealt with under the principles of trust law. Trust law is a complex area of law but very broadly speaking if a property is in joint names, it will be owned in equal shares unless there is written evidence to the contrary. If a property is in the name of one party, the other will have prove financial contributions were made toward the property in circumstances which give rise to a trust. Separate claims exist for children.
By contrast married couples have a whole range of financial obligations and responsibilities between them. Whether a property is owned in one party’s sole name or in joint names may be irrelevant when deciding how to divide assets in the event of divorce.
Let’s look at Peter and Victoria who are getting married next year. Peter’s mum has recently sold her large London home and intends to gift Peter some money as part of her inheritance tax planning. Victoria and Peter want to buy a property and propose to use some of the money towards their purchase. Mum is not entirely happy about the arrangement as she has never really trusted Victoria. Peter could ask Victoria to enter in to a pre-nuptial agreement. Although pre-nuptial agreements are not legally binding in England and Wales there has been a number of decisions which have resulted in significant weight being attached to these agreements by the Court. It is important that both parties enter into the agreement voluntarily and with the benefit of independent legal advice. The purpose of a nuptial agreement, whether it is made pre or post marriage, is to depart from the usual sharing principles of equality. This could mean excluding assets either party has prior to the marriage or sharing assets in a different way to take account of gifts, inheritance or other contributions.
So where do we end up? Accessing good legal advice is essential, if parents don’t intend to gift money to their offspring they need to think about setting up formal trust agreements or loan agreements. This may result in complications for the purchaser raising a mortgage. If the money is gifted, parents should encourage their children to think about the legal ramifications if they are involved in relationships. It is important that parents are sensitive to their children’s feelings and to the impact these discussions can have on partners, nobody likes to feel they can’t be trusted. However, dealt with sensibly and sensitively there is usually a legal solution which will help protect parents’ hard earned cash and avoid disputes if a relationship goes wrong.