It’s hard to overplay the importance of this lending: in 2017 alone BOMAD helped fund the purchase of £75bn worth of property, placing it among the top ten mortgage lenders in the country.
Potential Problems of BOMAD Lending
Parents want their children to be able to enjoy the security of home ownership and, generally, they want to offer support in any way they can. However, the legal technicalities and potential pitfalls of BOMAD lending for any outcome should not be overlooked.
Some families might feel that it is unnecessarily formal to seek legal advice regarding arrangements, yet, in fact, organising things in the right way at the outset is always the best method to protect the interests of all involved. Crucially, when it comes to property, formal recognition of a financial gift may increase the chances of your child actually getting a mortgage, while also reducing the possibility of contention or unexpected difficulty in the future.
Gift or Loan?
The main problem with parents providing a loan is that it can complicate the process of obtaining a mortgage. Most providers are not prepared to lend money if the applicant is already in significant debt – even if this is an informal arrangement with a parent. This is why parental funding for home buying purposes may need to be formally cited as a gift of cash in order to provide all or part of the deposit.
Many banks and building societies require the buyer to provide written proof that the deposit has been gifted and is non-refundable and unconditional – they need to know that they can repossess the property in an uncomplicated way in the event that the borrower is unable to meet their repayments. If all of the above is in order, most lenders will be happy to accept gifted deposits as long as they are outright gifts and no other party has an interest in the property.
You may need a solicitor to draft such evidence in order to satisfy the lender and to show that you have full understanding of your non-interest in the property. Be aware that lenders are likely to require all of the following information:
- Full details of all gifted deposits, including whether they have been provided by non-family members (these are less likely to be accepted)
- Whether the donors are UK residents and whether their funds are held in a UK bank or building society
- Whether the gifted funds are going towards a buy-to-let property
- A full explanation of how the balance of the purchase price will be met, typically from salary
What about the Tax Implications of Gifting?
Gifts are not categorised as a source of income so no tax is payable by the recipient. However, be aware of inheritance tax. If the donor/s die within seven years of the gift, IHT will be due on estates worth more than the threshold.
BOMAD Loans – Should you Draw up a Contract?
As a recent case illustrates, it is essential that a contract is drawn up stipulating the full details of any loan from the Bank of Mum and Dad.
In a case widely reported in the press, a retired couple re-mortgaged their Cornwall home to provide their daughter with £90,000; the sum was used to cover legal fees for a property inheritance dispute and allowed the daughter to secure a home left to her by her grandmother. The parents believed they could “trust their own daughter” so they did not draft any formal legal documentation.
When they later sought repayment on what they insist was a loan, the daughter refused countering that she believed the £90,000 to be a gift. The court agreed with her and as a result the parents lost their home.
What about a Deed of Trust?
Relationships can and do end. This can problematise gifts especially when they have been used by a couple to buy property. Parents naturally want to be sure that assets ‘follow’ their child in the event of relationship or marriage breakdown, but this may not happen without the proper contract in place.
A Deed of Trust sets out how money has been contributed towards the purchase of a property, and how it should be recovered in the future. This means sums can be effectively ring-fenced, so that gifts made by parents will go to their child (rather than being shared with the child’s spouse) in the event a relationship breaks down and the property is sold.
Reliable Legal Advice
No-one can see the future and if you are funding your children in any way, it is important that you have a clear understanding of your own expectations regarding the money. If a sum is a loan, and you will need it repaid for your own financial security, then you MUST seek legal advice and draft a contract with terms of repayment.
Sadly, financial and romantic security is never set in stone and situations change. What feels right for you in one moment may turn out to be a foolish, and costly, mistake in another. Legal advice is never a bad idea when it comes to BOMAD financial security.
For help with the legal issues relating to the Bank of Mum and Dad, including gifts, loans and Deeds of Trust, contact Wellers today.
We can also help with other arrangements, including the following:
- Equity as security
- Savings as security
- Guarantor mortgages
- Buying a property with your child
For advice and information please call
020 8464 4242 for our Bromley team
01483 284567 for our Surrey team
020 7481 2422 for the London City office and
01732 457575 for Sevenoaks, Kent