Thanks to soaring house prices, it is increasingly difficult for young people to get a foot on the property ladder and consequently the bank of mum and dad is often called upon to help out. In fact, parents assist with one and five property purchases, making them the UK’s tenth biggest lender, according to the Times. Unfortunately, few families record the nature of their arrangement in writing and this can cause difficulties down the line.
When a parent decides they want their money back and the child disagrees it was a loan, the parent has the burden of proving that the money was indeed meant to be repaid. Often the arrangement will have been agreed verbally and finding evidence that a loan was made can be a challenge. Should the dispute end up in court, parents face losing not only the money advanced but in addition, thousands in legal fees and expenses.
It is estimated that parents will either gift or lend £6.3 billion to family members this year with an average loan of £24,100. But whilst such arrangements start out with the very best intentions, they can end in heartache. Often, problems arise when a child splits from their partner and the parents want to see some or all of their funds returned rather than included in the divorce settlement. In one scenario parents spent £380,000 in legal fees intervening in the financial proceedings of their son’s divorce to try and recoup half the £2 million they’d handed to him and his wife to buy a home. They argued, unsuccessfully, that £1 million of the contribution was an investment in the property. However, without evidence to back up the claim, the judge found that the contribution had been a gift. Consequently, they lost their original contribution and had to pay both their own legal costs and those of their daughter-in-law.
The Times reports on another case where well-meaning parents almost found themselves homeless, having sold their property and put the proceeds into a home purchased with their sons. Initially the parents lived in the basement but then the sons sold the property and one disagreed that their contribution was anything more than a gift. With no restrictions on the title, the parents had to go to court to try and argue that they had an interest – but the court did not accept their version of events. The sons had an equal share and the parents ended up with nothing, although it is thought that one son may have given at least something back to them.
The number of such cases has increased rapidly over the past few years with one litigation funding firm reporting a jump from five to fifteen cases a month over the past 5 years. Such scenarios are easily avoided where a simple written deed is drawn up.
How to protect your interests
If you are a parent considering helping one of your children with the purchase of a property, be aware that mortgage lenders sometimes require a ‘gifted deposit letter’ to confirm that the contribution is a gift rather than a loan before they will advance the mortgage monies. Signing such a letter would make it very difficult for a parent to recover funds in the future. Not all lenders have this rule however – Natwest, for example, will lend if there is a repayable deposit.
Consider carefully whether you want the contribution to be a gift or loan. You may feel generous now but consider how you’d feel if your child split from their partner in the future. Would you be happy with your child’s ex getting half of the proceeds (including half of your contribution)?
If not, consider what terms you would agree to, such as :
- Will monthly repayments be required? If not, when should the loan be repaid by?
- Is interest payable?
- Alternatively, will the contribution give you a share of the house? If so, will any rent be payable on your share?
- What happens if the house is sold in future?
Once you have some idea of what you would like to achieve, speak to our property team about the possibility of drawing up an agreement or declaration of trust.
Putting your agreement in writing will help avoid future expense and heartache. If the arrangement is incorporated into a declaration or deed of trust it will ensure everyone is on the same page and will be legally binding. Without such an agreement, a court has to piece together what happened from any evidence available – and sometimes there is none.
Formalising your agreement not only helps protect your interest but it also avoids the possibility of falling out with family members down the line.