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Bank of Mom & Dad

 

Article date:  04/04/2014

Increases in the average house prices as the country comes out of recession, a shortage of affordable housing and the strict lending requirements adopted by banks following the recent financial crises demanding a deposit of at least 10% (or 5% with the government's 'Help to Buy' scheme) mean that according to official statistics, more young people than ever (some 3.3m 18-24 year olds) are now living with their parents. http://www.ons.gov.uk/ons/rel/family-demography/young-adults-living-with-parents/2013/info-young-adults.html

Many parents want to help their grown up children if they are able, in whatever way they can to climb onto the first rung of the property ladder. It is more common for first time buyers to turn to the 'Bank of Mum and Dad' for help in raising the required mortgage deposit.  Many parents are choosing to use their nest-egg to provide a much needed helping hand (particularly with interest rate on savings accounts being so low)however  a word of caution is needed.

A common way is for parents to "advance an inheritance" to children, helping them by using this lump sum as a deposit. This comes with dangers; there are limits as to how much you can give away, and while inheritance tax is free on gifts under a certain amount, should you die within seven years of making such a gift, the money will be considered part of your estate.

Further if the child is in a relationship or marriage that later breaks down, then the "gift" from the parents can become part of any financial settlement, with half required to be paid to the child's ex-partner. If in the form of a loan, an ex-partner could raise issues with regard to enforceability of the loan to avoid repayment (such as Consumer Credit Act or that the loan was really a gift).

Prior preparation is essential to ensure that the parent's generosity is safeguarded. Financial gifts of this nature can be protected.  It is important that when the new home is bought, we are made aware that the deposit has been given by a family member. The property title will be noted to reflect this, and that an appropriate Declaration of Trust is prepared. If this has not been done at the outset, there may be other ways for the monies to be protected on separation, but this can prove more difficult.

An alternative is to make any such payment by way of a loan rather than gift and to have a suitable loan agreement drawn up which can be secured against the property, or if an equitable charge (a security interest granted by a debtor which gives the creditor the right to recovery of the loan amount in case of non-payment) registered with the deeds.

Any such loan could be interest free and the parent may not even really expect that it would actually be repaid, but in the event of a breakdown in their child relationship, they will at least know that that payment will fall outside any dispute.

A further way to provide greater security if the child is in a relationship or marriage is by way of a nuptial agreement. These are being given ever greater weight by the courts, provided they are entered into properly. The Law Commission has also recently recommended legislation which would recognise binding nuptial agreements making them enforceable without further court intervention.

Such agreements would be subject to various qualifications and courts would still retain the right to assess financial needs in some cases but a pre-nuptial agreement should form part of the wedding planning process. Consideration should also be given to post-nuptial agreements where the child is already married.

At Higgs & Sons, we are experienced in dealing with first time buyers using parents for deposit and in protecting gifts or payments of this nature. If you would like advice on this issue please do not hesitate to contact Neil Stockall to discuss your options in more depth. For advice of wealth management, Peter Gosling in the Private Client department will be able to advise and for all family related matters, please contact Philip Barnsley. The switchboard telephone number is 0845 111 5050.

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