Why Legal Advice is Essential to a BOMAD Property Transaction
Acting as the Bank of Mum and Dad (BoMaD) in order to help a son or daughter meet the cost of buying a property or undertaking any other significant capital expense may seem like the most natural thing in the world to do. However, unless the terms, detail and conditions of the parental monetary assistance are laid out to a professional standard, any vagueness or ambiguity risks placing the parties concerned at risk of acrimony and, potentially, financial insecurity.
This is why it makes sense to take legal advice when committing to any Bank of Mum and Dad transaction. In fact, it is precisely because the assistance is so deeply personal and familial that contractual terms should be laid out as they would in any other financial agreement; the potential for traumatic financial and relationship fallout is simply too high in the event that anything goes awry.
Perhaps the biggest question facing those engaged in a BOMAD transaction is whether the sum constitutes a gift or a loan. All too often, the parties involved neglect to clarify this simply because they do not want to have to negotiate the difficult details involved.
Sadly, an act of generosity in offering financial assistance to a loved one may, at the time, be carried out amidst tears of gratitude and vague promises of “I’ll pay you back as soon as I can”, but once the house is bought and the For Sale sign comes down, the legal position of the parties may not be clear.
How NOT to do it – a case study
In 2019 the UK courts heard the case of a woman, Mrs A, who sought to reclaim money from her deceased son’s £815,000 estate, claiming that she had loaned £130,000, her life savings, to help him purchase his home.
However, the court hearing the case accepted arguments presented by the deceased man’s widow that the money was a gift rather than a loan, holding that there is a presumption that payment from parent to child constitutes a gift unless otherwise stated; in common law this is known as the Presumption of Advancement.
Mrs A, informed the court she had possessed material proof that she had been providing a loan rather than a gift but that it had “now disappeared”. Had the mother been able to present such documentation to the court it is likely that the judge would have reached a different decision in the case; however, as it was incumbent upon her to prove the monies were a loan, her case failed.
The judge stated: “This is little more than a blatant attempt by [Mrs A] to reduce the residue of [her son’s] estate, which would otherwise go to [his] widow…which is something [Mrs A] clearly finds hard to cope with.”
In an era when BOMAD assistance is increasingly the only way for the children of baby boomers to get a foothold on the property ladder, legal advice from an experienced solicitor should be considered the only prudent course of action when undertaking such a transaction and, if the worst comes to the worst, when a BoMaD dispute ensues.
There is no substitute for having the terms and conditions of the financial transaction laid out in writing, usually in the form of a “Deed” signed by all the parties involved, so that proof is visible at a later date. This is likely to include details of the following:
- The amount of the gift or loan
- How much, if any, is to be repaid
- How and when any money due will be repaid
- Whether any interest will apply
- What will happen in the event of the death of the child
- If the sum is a gift whether it might become a loan in the event certain conditions are met
However, BoMaD lenders should know that many banks and building societies require the buyer of a property to provide written proof that a mortgage deposit sum is non-refundable and unconditional, so if you wish to help your child buy a home there may be alternative structures to consider, such as becoming a guarantor or making a joint purchase, although these have risks associated with them, and the latter option mayhave Stamp Duty Land Tax, and Capital Gains Tax implications. The impact on Inheritance Tax (IHT) also has to be considered, and parents, and children, should review their Will, for instance, if the child being assisted has siblings, who may need to be treated differently.
Wellers – BOMAD solicitors
Wellers is a multi-disciplined legal firm which brings together its expertise on property law, family law and private client services such as Wills and trusts so that you can have the level of confidence and clarity you need when proceeding with a BOMAD transaction.
Whatever your BOMAD issue, contact Wellers today for help.