Key ways to protect you and your children if you are lending or gifting them money to jointly buy a property
With property prices in the UK so high and the difficulty of saving up for a deposit to buy a property, many parents want to try and help their kids get on the property ladder financially. In dosing so, there are very good reasons, both to protect your own interests but any child you wish to help, to insist, as a precondition of the loan or gift, on formal agreement to put the following documents in place.
Family loan agreement
Even within a family, or possibly especially within a family, it is wise to ensure that the terms of a loan are clear. From the outset it is important that all parties understand that the loan is not a gift, even if it might become so – for example, a gifted deposit – at a later date.
The terms of the loan can be set out in a Loan Agreement. This would cover aspects including the length of time before the capital is meant to be repaid, a specified repayment date, the amount of the repayments and what would happen in the event of a default. Other topics which might need to be addressed include who would pay any additional costs incurred, what would happen in the event of severance and/or a wish from either party to amend the terms.
There have been several well-reported cases of parents and children who had different ideas about a sum of money which changed hands in order to purchase a property or pay for education and often one party is left feeling angry or misled.
There are a number of important factors both the borrower and the lender should consider and while informal family loans may seem straightforward at the start, over time feelings and financial needs change. Lending money to family should rarely be treated lightly and if open communication about the terms of a loan is established, it could save a lot of heartache and financial stress in the future.
Declaration of trust
A Declaration of Trust should be drafted each time you buy a property with someone or with the help of someone unless all contributions to the purchase and going forward, will be equal.
If you and your partner own a property together, you should have a Declaration of Trust. But you might also want to consider having a Cohabitation Agreement (also known as a Living Together Agreement).
The purpose of a Declaration of Trust is for you to determine what happens to each person’s money. Even if the property (the legal title) is being held at the land registry in the name of one party, you can still have a declaration to confirm the shares of others who have an interest (known as a beneficial interest).
A declaration of trust should set out who owns the equity in the property in what proportions. It can cover items you own separately as well as things you own jointly. LTAs can be designed to allow for the inclusion of assets you may acquire during your relationship. They also allow you to specify who gets what if the relationship breaks down. It can also deal with how day-to-day finances will be split, right down to the finer details of mortgage and utilities.
If you decide to buy a property with someone else, either a partner or even a family member, a Declaration of Trust should be used to protect a deposit or deal with unequal shares.
On marriage breakdown both parties have identical claims in relation to finances and when considering financial arrangements between spouses the Court will consider the income of the parties and the matrimonial assets – i.e. any capital owned by either spouse – in their sole name or jointly by both spouses. Therefore all assets form part of the pot for division.
Given the Court’s wide discretion to divide the assets on divorce a pre-nuptial agreement should nearly always be considered if a significant sum has been loaned or gifted by parents.
A pre-nuptial agreement, separate to, or in conjunction with a declaration of trust, can set out intention for a property. For example, if the parents of one spouse gifted a deposit or have a mortgage interest in the property, then a prenup should acknowledge both spouses’ agreement that the value of this share would be honoured if the marriage ended in divorce.
Legal advice and assistance from experienced solicitors
If you are looking for legal advice in relation to a Bank of Mum and Dad property purchase, guarantor mortgage, offset mortgage, Declaration of Trust, Family Loan Agreement or Prenuptial Agreement, the solicitors at Wellers can help.
We can also help if you are considering gifting property to a family member.