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The ‘Bank of Mum and Dad’ is now one of the top 10 mortgage lenders. So how should you advise clients receiving funds from family, and when should you advise them to consult a family lawyer? Jo Edwards, Jamie Gaw and Anna Jassani explain.
The property market over the past year has been bumpy to say the least. Since April 2017, we have witnessed not only the impact of the UK’s decision to leave the EU, but also the effects of the government’s clampdown on the buy-to-let market. However, despite many predicting a property crash, the Office of National Statistics (ONS) recorded that in the 12 months to April 2017, house prices rose by 5.6 per cent, compared with a 1.7 per cent rise in wages. In this environment, unsurprisingly, many young people look to family to enable them to realise their otherwise distant dream of becoming a homeowner.
However, it is not only first-time buyers who are relying on handouts from family. A recent study suggests that a third of so-called ‘second-steppers’ (those looking to move up the property ladder) also rely on the ‘Bank of Mum and Dad’ to enable them to move to their next property.
According to recent reports, the combined value of funds contributed by parents towards children’s property purchases will amount to £6.5bn in 2017 – a 30 per cent increase on the £5bn loaned in 2016. This makes parents a top-10 mortgage lender, if ranked alongside commercial lenders.
The prevalence of purchases involving funds from parents means that conveyancers need to be up to speed with the rules and pitfalls surrounding these sorts of transactions. The issues on most property lawyers’ radar will relate to lender requirements and anti-money laundering (AML) requirements. However, conveyancers should also be aware of the potential family law issues that may arise if the transaction involves a couple, and be able appropriately to highlight these to their clients.
A gift or a loan?
At the outset of the conveyancing transaction, practitioners should ask their client how the purchase is being funded. If your client tells you that their parents are funding the deposit (or part of it), you will need to check whether the money in question is a gift or a loan.
In many cases, the money will be gifted. This is often done as part of estate planning: no inheritance tax is payable on the funds transferred if the person making the gift survives for at least seven years afterwards (gifts made three to seven years before the donor’s death are taxed on a sliding scale known as taper relief). Also, if the buyer requires a mortgage in order to purchase a property, it will be difficult to find a commercial lender who will be willing to lend if the deposit is funded by way of a loan, due to the potential risk of the parent lender later asserting an interest in the property. Additionally, many buyers who require funds from family also need to obtain the largest loan possible, and if they have any outstanding loans, this will likely have an impact on their mortgage capacity.
Where parents loan rather than gift purchase money to a child, they should obtain their own independent legal advice. When loaning money, parents may wish to formalise the terms on which the loan has been granted (to future-proof against any change in circumstances on either side) and safeguard the repayment of the loan by acquiring a security interest in the property. Additionally, parents may want to enter a restriction on the title to the property so that the property cannot be sold without their consent. The loan will need to be disclosed to any commercial lender lending against the purchase, and, provided that the lender consents to the loan, any security interest acquired by the parents in the property would be secondary to that of the lender.
The proper documentation of a loan from parents can also become important if the couple are married and later divorce: the documentation will provide clear evidence to third parties (such as a spouse on divorce, or rather a judge looking at the marital pot) that this is a hard debt with an expectation of repayment.
Parents do not need to be concerned that the grant of the loan to an adult child to purchase a property will bring the transaction within the additional / higher rates of stamp duty land tax, as any security interest acquired will be exempt for these purposes. Different rules apply if parents are assisting a child under the age of 18.
Assuming that the buyer is raising a mortgage in order to purchase a property and the money being contributed by parents towards the deposit is a gift, what information needs to be provided to the lender?
If the buyer is receiving a gift towards the property purchase, practitioners should check the individual lender’s requirements in the UK Finance Mortgage Lenders’ Handbook (formerly the Council of Mortgage Lenders’ Handbook) or with the lender directly. Most lenders will ask that the person making the gift signs a declaration confirming that the money being provided is a non-refundable and unconditional gift, and that they have no interest in the property. The donor should also confirm their relationship to the recipient. However, while some lenders require conveyancers to report the gifted deposit to them, others simply ask that the signed declaration is obtained by the conveyancer and kept on their file, providing that other certain conditions are also met, including that the property is being purchased to live in and is not a buy-to-let, and the gift is from a family member.
Additionally, most lenders will require bankruptcy searches to be carried out against all parties contributing towards the purchase price; you must notify the lender if you cannot obtain clear searches. Some lenders will also only accept gifted deposits where the person making the gift is a UK resident, and where the funds being provided are held in a UK bank or building society account.
All practitioners will be familiar with the AML requirements in respect of clients. Where there is a gifted deposit involved, it is best practice to obtain AML documents in respect of whoever is gifting the deposit.
However, gone are the days when a simple ID check will suffice in ensuring AML compliance. Now that the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 have come into force, practitioners are required to conduct a documented risk assessment for each client. Arguably the most important aspect of your risk assessment will be to establish the source of the funds being utilised towards the purchase (regulation 28 (11)). Where a gifted deposit is involved, you need to be especially diligent in your approach to checking the source of the funds, given that you are unlikely to meet your client’s parents, and your knowledge of their financial position is likely to be limited to what your client has told you.
If the funds come from one discrete source, such as the sale of a house, a pension drawdown or the sale of shares, it will likely be easy to establish where the money has come from by checking the relevant documents (such as a copy of the completion statement and a copy of the relevant bank statement showing the money being received from the solicitor’s bank account). If, however, the funds have been accrued over a long period of time or emanate from multiple sources, it may take longer to verify the source of the funds. If money has accrued from savings, it may be necessary for your client’s parents to provide bank statements covering the complete period during which the money has been accruing.
If the money is coming from a high-risk country or is derived from a high-risk activity, or if your instruction or the transfer of the monies to the client does not seem to marry with the information you have for the client, due consideration should be given as to whether appropriate authorisations to continue with the transaction may be required.
Restrictions on who can give a gift – can a relationship be too remote?
It is up to the discretion of individual lenders as to who can give the gift (again, it is worth referring to the UK Finance Mortgage Lenders’ Handbook). However, as a general rule, the remoter the relationship between the donor and the recipient, the less likely the lender will be to accept the deposit. So while most lenders will be happy to make a mortgage offer where the purchase involves a gift from a parent, spouse, cohabitee or child, and some will be comfortable if the gift is from a remoter blood relative (such as a grandparent, sibling or aunt), very few, if any, would accept a gift from an unrelated third party such as a friend or an employer.
This is because of lenders’ concerns regarding fraud and money laundering. The logic is that while it is understandable why a parent or relative would wish to help their child onto the property ladder, it is harder to understand why a friend would wish to do so, unless they either were getting something in return, such as an interest in the property, or were involved in money laundering.
Family law issues
Family law issues may not be at the forefront of most property lawyers’ minds when acting for their clients in relation to property purchases. However, if your client is married or in a cohabitating relationship (or intends to marry or cohabit in the future), there is a risk that the property (including any equity funded by parents) could be the subject of claims on divorce or relationship breakdown. If that is the case, a family lawyer will be searching for clues in the conveyancing file as to intentions around ownership. It is therefore recommended that all conveyancers have a working knowledge of the potential family law issues that may arise in relation to property purchases and the options that are available to protect parental contributions, if only to know when it may be prudent to refer a client to a specialist family practitioner at the time of purchase.
The number of couples choosing to cohabit is increasing. According to the ONS, it more than doubled between 1996 and 2016, from 1.5 million families to 3.3 million. Cohabitating relationships are statistically far more likely to end through separation than marriages. However, unlike with married couples, there is no statute governing the rights of cohabitees when their relationship ends and, save where there are minor children, the property rights of cohabitees are governed by property and trust law, not family law.
If your clients are cohabitees who are purchasing a property together, you will ask them whether they wish to own the property as joint tenants or as tenants in common. If one of them is funding the deposit by way of a gift from their parents, it would be prudent to explain that:
a) they have the option of entering into a declaration of trust specifying the proportions in which they own the property (which can then reflect the greater financial contribution of one of them due to a gift from parents); and
b) absent a declaration of trust specifying otherwise, the court’s assumption will be that a couple own the legal title in equal shares.
Where a couple do not expressly declare their respective beneficial interests in the property on purchase, there is also a risk that one of them will later argue that their ownership of the property has changed (see Jones v Kernott  UKSC 53).
If the couple choose to purchase the property as joint tenants or as tenants in common with equal shares, even though one of them has made a greater financial contribution, you must keep a contemporaneous file note of the advice given, to prevent any complaints down the line.
In addition to entering into a declaration of trust, there is also the option of cohabitees entering into a cohabitation agreement which states what the couple’s respective beneficial interests in the property should be. A cohabitation agreement is particularly useful where you are acting for a client who is in a cohabitating relationship but purchasing a property in their sole name with the help of their parents. In this scenario, the client will likely want to ensure that there is no risk of their partner acquiring an interest in the property – for example, if they contribute towards the mortgage or to works to the property. If a client would like to enter into a cohabitation agreement, it is advisable to refer them to a specialist family practitioner.
Both marriage rates and divorce rates have generally been in decline over the past few decades, but the most recent ONS statistics indicate that people in their mid- to late-20s are still divorcing in significant numbers, which likely covers many who may have received money from the Bank of Mum and Dad.
Typically, the family home is regarded by the English family courts as matrimonial property, due to its central role in the marriage. More often than not (especially if there has been a long marriage), provided that parties’ needs are thereby met, the equity in the family home will be divided equally, even if one party made a greater financial contribution than the other, and whether or not that contribution was gifted by their parents – unless the parties have entered into a nuptial agreement.
The benefit of a nuptial agreement is that it can seek to ring-fence the gifted amount and protect it against future claims on divorce. The success of a nuptial agreement in protecting the money gifted will depend upon a variety of factors, including what other assets are available to the couple to meet needs on divorce, the length of their marriage, and the standard of living they enjoyed. As a general rule, the longer a marriage, the more likely it is that any such gift may become blurred into being regarded as part of the marital pot. However, since the landmark case of Radmacher v Granatino  UKSC 42, the English family courts are ever more likely to uphold nuptial agreements – provided they are fair, there was legal advice and financial disclosure, and (in the case of a pre-nuptial agreement), it was signed at least 28 days before the wedding, to avoid later suggestions of duress.
Accordingly, if your clients are contemplating marriage or are already married and one of them anticipates being gifted money towards a purchase, you may wish to suggest that they (and/or the parents of the spouse who is receiving the gift) consult a family specialist regarding the option of entering into a nuptial agreement before proceeding with the purchase.
Clients should also consider updating their wills, to ensure that in the event of their death, the amount gifted either passes back to their parents or to any siblings or grandchildren, rather than to their spouse – providing, of course, that the property is held as tenants in common and subject to the provisions of the Inheritance (Provision for Family and Dependants) Act 1975.