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Banking on it

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The so-called Bank of Mum and Dad plays a vital role in helping young people to take their first steps on to the housing ladder, but the legal issues for a solicitor to deal with are manifold. Sally Pike advises on how to ensure things go as smoothly as possible

According to a survey by Legal & General, the unofficial parental lending institution known as the ‘Bank of Mum and Dad’ will account for approximately a quarter of all mortgages to first-time lenders, 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.

In this article, I discuss the various legal issues that the Bank of Mum and Dad raises, particularly when the child is buying with a partner, or decides to get married in the future.

Working together

As a private client solicitor, you should take a holistic overview of what your client (and their family) wants, depending on their personal circumstances, and then make sure the work is undertaken by the solicitor with the right skill set in your firm. Having a main point of contact who can identify the issues and refer the issue to another team if necessary, is very important.

It is also important to offer collaborative advice; if you are acting on behalf of the parents, make sure your property team are involved from the outset and that the parents get proper tax advice on the implications of giving the financial assistance, particularly if they are gaining a legal and beneficial interest in the property.

While parents are keen to help their children get on the property ladder, they are not so happy to see their hard-earned cash benefiting a third party if their child’s relationship fails 

Who are you acting for?

It’s crucial to clarify right from the start on whose behalf you are acting, so that you do not end up with a conflict of interests. If you are contacted by parents seeking advice on a pre-nuptial agreement for one of their adult children, it is vital that you take clear instructions from the adult child at all times, without interference or pressure from the parents; where necessary, advise the parents to seek their own legal advice. Practically, if your client comes into the office with their parents, you should make sure you see your client on their own to be confident you are getting instructions independent of their parents.

Formalising the investment

While parents are keen to help their children get on the property ladder and reclaim their homes for themselves, they are not so happy to see their hard-earned cash benefiting a third party if their child’s relationship fails. 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 the family.

Therefore, it is not uncommon for parents to take the lead in getting legal advice on how they can protect the financial gift to their child, and make sure it does not form part of the assets which would be included to be divided if the relationship between their child and the child’s partner / spouse fails. Parties need to have a clear understanding of whether the money is a loan or a gift, and the resulting parental complications of each scenario.

It is an issue that comes up time and time again in financial negotiations in divorce. For example, the husband or wife will explain how their parent(s) gave them £25,000 to put towards the deposit for the purchase of the family home, or £15,000 to enable them to build an extension or to redo the kitchen. At the time, there will have been little discussion between the parents and their offspring as to how the payment of that money should be treated, because in reality, it was a gift – or perhaps a gift with strings attached, with a view to it being paid back at some point in the future, on the sale of the property. Nine times out of 10 in these kind of transactions, there is nothing in writing and no terms attached, which makes it very difficult for the parents to then argue that they want their money repaid now that their child and partner are going their separate ways.

If the parties were married, it is very common for these types of payments from parent to child to be labelled ‘soft loans’ by a judge, even when there is written evidence that the money was intended to be repaid at a later point. Judges distinguish between these loans and those liabilities owed to credit card or financial companies because, for the latter, the company will not hesitate to act to pursue recovery of the money owed to them through the civil courts, and ultimately they can pursue bankruptcy proceedings or other remedies for non-payment. It is, however, highly improbable that a parent would take the same action against their child to recover the debt, which is why they are usually categorised as ‘soft’ loans and placed way down the pecking order in terms of how assets are divided.

Obviously, the safest way for parents to protect their investment for their child is to put their names on the title deeds or buy a property in trust for their child. This may well be sensible where the financial contribution is large (such as buying a house for their child mortgage-free), but the more difficult – and common – situation is where the parents are making a limited financial contribution. Parents rarely want to be on the legal title because of the complexity of owning the property with their child and the child’s partner, and also because of the capital gains / inheritance tax implications of doing so, particularly when they are often at a stage of their life when they want to simplify their tax affairs

Co-habitation v marriage

There is a real distinction to be drawn in cases where the young couple will be living together and where they are married, or are going to marry, in terms of how to legally formalise the parent’s contribution.

It is very common for these types of payments from parent to child to be labelled ‘soft loans’ by a judge, even when there is written evidence that the money was intended to be repaid later 

Co-habiting couples

The myth of the common-law wife / husband still prevails, and it’s important to explain carefully to cohabiting couples the complexity of trust law for cohabitants. In particular, if one member of the couple is putting more money into the purchase of the property as a result of their parents’ financial assistance, they need to hold the property as tenants in common, with a declaration of trust as to beneficial interest, instead of registering as joint tenants. This may be the simplest and most cost-effective way to protect the unmarried couple’s respective interests when they are buying together. It is still surprising how many people tick the joint tenant box in form TR1, even though they have made unequal contributions. In the absence of fraud or duress, this means it is unlikely in law that the division of proceeds will be anything other than equal. However, contrast the situation in which the parents are loaning money to their son to put down a deposit on his first property. The son has a long-term girlfriend, and they have discussed moving in together, but have not yet done so.

The first point to make is that, under new mortgage affordability rules, the deposit from his parents will need to be disclosed to the mortgage lender. Mortgage companies will treat the loan as a debt owing, which could affect the credit scoring of the son, and may present a problem in him raising the mortgage.

His parents don’t expect him to repay their investment and are happy to confirm it is a gift, but are worried about their son’s girlfriend being able to claim part of the money if their relationship fails. In these circumstances, one option would be for the son to ask his girlfriend to enter into a ‘living together agreement’, to set out the basis on which they are going to cohabit. Their agreement could set out what contributions they will each make to the household; what, if any, interest his girlfriend will have in the property; and how the initial deposit from his parents will be treated. This can be prepared by a family or private client lawyer, although it is unlikely to carry any legal weight as it is not a contractual document.

Married couples

By contrast, married couples have a whole range of financial obligations and responsibilities between them, and whether a property is owned in one party’s sole name or jointly may be irrelevant. The parties may have expressly stated their beneficial interest in the property by way of a declaration of trust, and while the judge will take into account contributions brought into the marriage when making a decision as to the division of capital assets and income under section 25 of the Matrimonial Causes Act 1973, this can be overridden by the courts if the financial needs of the parties, and particularly any children, are paramount in arriving at a different division of assets. It is often in this scenario that the issue of the ‘soft loan’ from one parent arises.

Pre- and post-nuptial agreements

If the money was gifted by the parents while the couple were cohabiting, it’s important to make sure that on marriage, there is as much evidence as possible about how the gift or loan from the parents will be treated. If the contributions being brought into the marriage are very unequal, it’s worth considering a pre-nup to reflect and record the advancement of money from the parents, and state that the money should not be shared in the event that the marriage breaks down.

Although pre-nuptial agreements are not legally binding in England and Wales, couples have attached significant weight to these agreements in a number of cases.

The parties could also enter into a post-nuptial agreement after marriage, to record contributions which may come into the marriage from one spouse through financial assistance from a parent, for a loft conversion or kitchen extension, for example. This type of formal evidence is more likely to carry weight with the court with a view to a departure from an equal division of assets.

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.

Difficult conversations

Clearly, a client formalising their investment from the Bank of Mum and Dad can lead to legal complications and some difficult family conversations.

Clearly, a client formalising their investment from the Bank of Mum and Dad can lead to legal complications and some difficult family conversations

It can be awkward for parents to raise doubts with their children about how long their relationship with their new partner may last. Many parents often express quiet anxiety about this, but want simply to do the best for their child and not to interfere. This can lead to disputes, and on more than one occasion, I have been called by a parent telling me that their child wants to enter into a pre-nup and are very insistent that this is done. However, the offspring is often very reluctant to enter into the pre-nup, as they feel it will upset their partner, but are at the same time conscious that financial support will not be forthcoming without one in place.

Family and private client lawyers with a plethora of soft skills are well placed to deal with these family issues, and should be able to manage the situation delicately and constructively.

Conclusion

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. If parents don’t intend to outright gift the money for a property to their offspring, they need to think about setting up formal trust agreements or loan agreements, although 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. 

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