So what is the solution? Well, most of us will be all too familiar with the concept of “The Bank of Mum and Dad”. Put simply, it is not uncommon for parents to provide their children with the money needed to get them on the property ladder. Whilst this seems the most logical answer, it does need some further thought.
The first step is deciding whether the funds are provided by way of a gift or a loan. With a gift, one must be mindful that there can be no expectation of repayment, no matter the circumstances. This is often not what is intended.
Whilst a parent may be happy for their child to benefit from their contribution, often they would not be happy to see those funds placed in jeopardy where, for example, their child uses the money to purchase a property jointly with their spouse or partner. Would the parent be prepared for 50% of their gift to pass to their child’s spouse or partner in the event of any possible relationship breakdown? The answer is, more than likely, going to be “no”. It is perfectly understandable that the parent would want to protect their hard-earned capital.
Protecting your capital
A parent providing funds should always consider how they are buying the property and whether they are buying the property alone, or jointly with their child. It is often the case, particularly given the potentially adverse tax implications, that the property will not be held in the parent’s name at all. Therefore, consideration needs to be given to protecting the parental contribution from relationships, both current and future and to the possible ramifications of any such relationship breaking down.
- If the parent’s contribution will be used by their child to fund a purchase jointly with a spouse, partner or even a friend, are the parties all contributing equally to the cost of the purchase? If not, consideration should be given to a ‘Declaration of Trust’ to protect any unequal shares and how much each party would receive should the property be sold.
- A cohabitation agreement may also be used to set out the responsibilities and rights of each party. This will make it clear who owns what (not just the house) and also sets the expectations for meeting the costs of living and more importantly, what should happen if the relationship were to end.
- If the contribution is to be used to fund a purchase in the child’s sole name, consideration should be given to other scenarios which may arise in the future. For example, if the child wishes to allow a lodger, friend or partner to move in. In such circumstances, it may well be necessary to enter into a tenancy agreement to make it clear that the third party is not acquiring an interest in the property.
Unfortunately, it doesn’t end there. Thought must also be given to how any relationship may evolve in the future. Does the agreement provide properly for the arrival of children? Does it anticipate marriage, separation and even remarriage? If not it may well need revisiting. Following a divorce, should one of the parties decide to remarry, any agreement may cease to be binding and so one should consider the need for a pre-nuptial or post-nuptial agreement to deal with such eventualities.
It is likely that the parties will also need to write or update a Will. It is always worth considering the implications on one’s estate when buying and selling property. If the sum being provided constitutes an early inheritance, does this need to be taken into account in the Will to ensure fairness in respect of any other children?
Comprehensive legal advice
Helping family onto the property ladder is a legal minefield but protecting family assets is incredibly important. The first step always is to take advice from a multi-disciplined firm of solicitors which can address not only the property issues, but those which require consideration from solicitors specialising in providing Family and Private Client advice. In this way, one can fully understand the options and avoid any unforeseen consequences.
If you are helping somebody onto the property ladder please contact us to find out what safeguards you can put in place. Call 020 8464 4242