A recent article in the Sunday Times has highlighted various pitfalls that can occur when parents give or lend money to their children in relation to property purchases.
Often referred to as the “Bank of Mum and Dad”, this source of funding is becoming increasingly common and it is thought that the Bank of Mum and Dad could actually be the UK’s tenth biggest lender, involved in up to a fifth of all property purchases.
However, these arrangements can potentially go wrong and it is thought that an increasing number of cases are going to Court. Disputes typically arise where the child’s relationship breaks up and the property is sold. Without clear documentary evidence, parents may be forced to go to Court to get back their money and there is no guarantee they will be successful.
One particular issue is trying to determine exactly what type of arrangement exists between the parents and their child. It will need to be established whether the money was given as a gift, in which case the parents will not be entitled to have it back, whether it was lent in which case what are the terms of the loan or whether it is actually an investment in the property being purchased. The key thing is to ensure that the payment is properly documented at the outset, whether that is in a loan agreement or declaration of trust which sets out the parents’ share in the property.
If the payment is a straightforward gift, then that should still be recorded to prevent problems in the future.
Another scenario could be where a gift is made to one child and then the parents die and on their death there is a dispute between the child and their surviving siblings as to how the gift should be taken into account when the parents’ estate is divided. Again, one way to help avoid these disputes would be to record the gift and also look to reflect it in the parents’ wills so the position is clear.
A further problem area could be where the parents’ own relationship breaks down and one or both of them tries to recover money previously paid away.
There are also tax considerations to be considered, for example in relation to inheritance tax or possibly capital gains tax for the parents if they acquire an interest in the child’s property.
With this in mind, it is extremely important that if the Bank of Mum and Dad is used, both the parents and children should think carefully about the consequences and take advice and have the transaction documented appropriately.
