It feels that almost every month or so, new reports are released by lending institutions claiming that the “Bank of Mum and Dad” is not only supporting the younger generation, but the economy as well.
The last figures from Legal and General estimated that lending from parents to allow their children to get on the property ladder may amount to £5 billion in 2016.
Lindsey Canning, head of family law at Wake Smith Solicitors, looks at how a generous gesture can backfire if the right procedures are not followed.
When money is provided, be it by way of gift or loan, it frequently coincides with either an adult child starting a new life with their partner, or when grandchildren arrive and the adult child needs to fund a larger property.
The first decision to make is whether the money is intended to be a gift or a loan. If it is a gift, then once the money is handed over to the adult child, it becomes theirs. In such circumstances the adult child should be encouraged to protect their investment in the property (if they are to own the property with someone else) either by way of:
- A declaration of trust to ring-fence the gift, or
- To hold the property in unequal shares to reflect enhanced contribution by the party who has received the gift.
Should the parents decide that the monies are to be a loan, then there should be clear evidence of the loan agreement either by way of:
- A loan agreement or
- A charge / mortgage over the property
and either document should set out whether any interest is to be charged and in what circumstances the loan must be repaid.
If the adult child is married, or later marries, and there is then a subsequent divorce, the court can take the loan agreement into account as a liability, but will view it as a “soft loan”, in other words that the parents are unlikely to take aggressive action against their own child to reclaim the money owing.
Our advice is always not only should parents take advice before gifting or lending any money to their adult children, but also that the adult child should take steps to protect what has been provided to them.
Parents should remember that banks always require security; there is no reason why the “Bank of Mum and Dad” should not do the same.
