Family members and friends are currently helping to finance one in four property transactions, recent research has shown. This new phenomena has been eloquently titled “the bank of mum and dad”.
Benefits of parents financial assistance
On the face of it this sounds like a fantastic idea with parents being able to help their children get on a foot on the property ladder. There are sound reasons for doing this, not only in terms of helping your children get on the housing ladder, but also for inheritance tax planning purposes; taking money out of your estate which may not then be taxable on your death. However the implications go beyond these considerations.
The advice to all who may be considering this option is to ensure you have all the facts to hand before doing so. This means taking advice not just in respect of the tax implications, but also the legal implications for the family in the event of a future relationship breakdown.
When parents help their child to purchase a property, nobody wants to consider the “ifs and buts” of the future. If we all had a crystal ball it would certainly make life easier. However with relationship breakdown increasing every year serious consideration must be given to those future “ifs and buts” when advancing money.
Should you decide to advance money to your child to enable them to purchase a property, you ought to consider the position of any present or future partner living with them. If no clear agreement is made at the time the money is advanced then, in some circumstances, the partner could claim a beneficial interest in the property in the event of a separation.
Your money – their divorce
Should your child marry their partner, consideration ought to be given to what happens to any money advanced by you to your child in the event that they are subsequently divorced from their partner. Obviously much depends on your intentions at the time the money is advanced, but many well intentioned parents are horrified to later discover that the hard earned cash invested in their child’s home becomes the subject of a dispute between their child and a former spouse/partner.
Ways to protect your loan or gift
There are various ways in which such money could be protected. If the money is loaned and set out in a formalised document like a Deed or Declaration of Trust, there will be a much stronger case that this money should be repaid in the event of a breakdown and subsequent house sale. Do consider however that preserving an interest in this way may not have the effect of removing the funds from your estate for tax planning purposes.
If however the funds are gifted, which is the position in the majority of circumstances, then such gift will have a lower legal standing which means there is a greater chance that it will form part of any future dispute between your child and any former partner. Pre-nuptial and Post-nuptial Agreements (in the event your child chooses to marry), or Co-Habitation Agreements (if they do not) are a sensible way of ensuring that all the parties involved know the position in respect of any gifted money and trying to protect it in the event of relationship breakdown. This also has the happy benefit that the funds can still be treated as leaving your estate for tax planning purposes.
Take advise to make the situation clear
Whilst such measures may appear premature at the outset they can be an absolute lifeline in the event relationship breakdown. If you are in the process of purchasing a property with gifted/loaned money or you are cohabiting or looking to marry and residing in property with loaned/gifted money from family then please contact The Family Law Company for a free appointment to discuss the options available to you. Taking such steps now could save a lot of heartache in the future.