Bank of Mum and Dad
Parents who help their children get on the property ladder are being urged to adopt a more professional approach when it comes to handing over the cash.
Faced with high rental costs and soaring property prices, more parents are dipping into savings or releasing capital from their own property to support the next generation. Research by Legal & General estimates that a massive £6.3bn was provided last year by the Bank of Mum and Dad – or BoMaD – as it’s known. The figure effectively makes BoMaD the 11th largest mortgage lender in the UK, based on rankings compiled by UK Finance, the collective voice for the banking and finance industry.
When the money was handed over, 59% received it as a gift with no requirement to pay it back, and 14% received a mix of gift and loan. Only 6% were charged interest and just 8% of those doing the lending wanted an equity stake in return for their contribution.
However, with the average contribution of families and friends now standing at a massive £24,100 – and £31,000 in London – it can prove a minefield if it’s not made clear whether it’s a gift or a loan, covered by an agreement in writing. And while parents may be happy to support their own children, if the contribution ends up with someone outside the family, it’s likely to cause additional problems when there are considerable sums involved.
That situation was played out in court recently, when a mother tried to secure the return of the contribution she had made to her son’s property purchase, after he died leaving everything to his wife. In Farrell v Burden, Mrs Farrell loaned her son £170,000 in 2005, and he repaid £90,000 later that same year, but with no further capital sums or interest paid after that. When he died 11 years later, leaving nothing to his mother, she took action to recover the outstanding amount she said was due from his estate.
But his widow, Ms Burden, claimed that the money had been given to the couple and in the absence of any documentation, the court said the payment was a gift in the eyes of the law. Mrs Farrell was ordered to pay the costs of the estate in the action, reportedly around £100,000, as well as losing her claim for the money. While she appealed the case, when it reached the High Court, they upheld the judgment on the grounds of lack of evidence, as she had not asked her son or his wife to sign anything that would support her claim.
Explaining, Robert Moseley, Property Law Solicitor at Berry & Lamberts, said: “We are seeing more parents stepping in where they can afford to support their children in buying a property, but that is giving rise to problems down the line, with more challenges to estates or worries over divorce settlements, when the terms may have been discussed, but not clearly set out in writing. While the cost of preparing such agreements may seem unnecessary in the happy situation of handing over the cheque to help children onto the property ladder, the potential costs of litigation further down the line can be considerably more than the original loan – as happened with Mrs Farrell.”
When parents contribute money to the purchase of a property by a child and partner there are several scenarios: The payment might be a gift to the child; it might be a gift to the child and partner; it might be a loan to the child or a loan to the child and partner; or it may be that the parents intend to be entitled to a share in the property. Whether to avoid later disputes, or simply to resolve any unclear thinking at the time, it is vital to have a proper legal agreement recording what was intended.
Such documentation is not just important for setting out a loan to ensure money is repaid, it is equally important in setting out where it has been made as a gift and to whom the gift was made. For inheritance tax planning purposes, documentation to support when the money was paid and confirming that it was made with the intention of being a gift may be crucial, if it is to take advantage of the rules concerning such gifts when inheritance tax is calculated on the death of the giver. The parents should take independent legal advice before entering into these types of scenarios. Joint owners should also consider having an agreement between them if one of them is benefiting from a parental gift and therefore contributing more to the purchase of the property.
The position can get even more complicated if there is to be a bank or building society as the main lender. Many mainstream lenders will not proceed if the parents are to have an interest in the property and at the very least the parent’s interest will have to be postponed behind the interest of the lender. Parental loans may be taken into account in lender’s affordability tests for borrowers, particularly if repayments and/or interest are required. That may leave parents with a choice between risking an outright gift or not helping at all.
The sums involved, and the complexity of property purchases, make it essential to get the right advice. The top ten mortgage lenders would not hand over cash without having their interests properly protected and the BoMaD need to take the same approach.
To discuss your residential or commercial property needs, email Robert Moseley, Property Solicitor, or telephone 01892 526344.
The contents of this article are for the purposes of general awareness only. They do not purport to constitute legal or professional advice. The law may have changed since this article was published. Readers should not act on the basis of the information included and should take appropriate professional advice upon their own particular circumstances.