What can go wrong when lending or gifting children money to buy a property?

Helping to fund a property purchase is a major financial commitment whether you are giving or lending money. Many parents may worry whether their hard-earned cash could end up in someone else’s pocket and wonder how to protect the capital; if not for themselves then for their child.

Things can go wrong and there are number of potential issues that could arise in the future when a house is purchased in a Bank of Mum and Dad transaction. So, it is wise to protect against them now.

  • If you are lending money you need to consider how the funds will be protected. Will there be a charge against the property  or maybe a Declaration of Trust?
  • If it is a gift, how will you ensure it remains with your child and is protected against others’ interests?

Unmarried partners

Where there are no legal protections in place and a property is being purchased (co-owned) by an unmarried couple, if the relationship breaks down what would happen to the parents’ contribution?

Where that interest in a property is not protected by a charge then an application under the Trust of Land and Appointment of Trustees Act 1996 would need to be made. A party would be asking the court to determine what their share of the property is and no doubt they would also be seeking an order that the property is sold, to realise that interest. In deciding this kind of application the Court will firstly want to know if there is express declaration – i.e. is there a declaration of your interests. If there is, then this is legally binding and conclusive and can only be rescinded/rectified on limited grounds such as fraud or mistake.

If there is no express declaration the Court needs to determine who has an interest in the property. This is a complex area of law and will need to include a consideration of the following:

  • Is the property the family home/main residence or an investment?
  • Are the parties engaged?
  • If the property is owned jointly then the Court usually presumes equal ownership.
  • Is there a resulting trust? – this is primarily looking at the parties financial contributions to the property.
  • Is there a constructive trust? – what was the intention behind the purchase/ownership? Did that intention change and did someone act to their detriment reliant on that intention? The Court will look at that intention objectively from looking at the parties’ conduct and dealings with one another, this need not just be financial?
  • Is this is a case where there is proprietary estoppel? – this is similar to, and often argued alongside, a constructive trust with a promise made that is relied on to one’s detriment.

The Court may also have to consider payments that have been made after the trust was brought to an end as one party may still live there and be paying the mortgage whilst benefiting from occupation.

Aside from an application under the Trust of Land and Appointment of Trustees Act 1996 there could also be an application under Schedule 1 of the Children Act 1989, if there are children to consider who live in the property. In most cases these can go hand in hand and one application is often met with a Schedule 1 application to be dealt with at the same time. This is an application for financial provision for children and as it can include an application for housing, the property will be under consideration. Even with determining what your respective interests are the Court will consider whether the property can be retained to provide housing for the children and if so under what terms. There are lots of factors to consider after examination of each party’s assets, income and liabilities and expert advice is helpful at an early stage.

Married couples

If you are married the Court will divide the assets, including the property, in accordance with their general powers. On divorce the Court are not bound by the terms of a Declaration of Trust but a Nuptial Agreement would be a factor to take into account in the division of the assets. Otherwise, the Court is bound to consider various factors (Section 25 of the Matrimonial Causes Act) which place the needs of any children as the primary consideration. The focus is then on the parties’ needs and resources. The starting point for the division of assets is equality and the court look at various factors to decide if a departure from equality is justified and, if so, in whose favour. The outcome is therefore impossible to predict as it will depend on what the finances and personal circumstances of the parties are at the time.

During either claim if a family member alleges they have an interest in the property they may have to be separately represented and be joined to or intervene in the proceedings to have their interest, if any, determined by the court.

Any such claims can involve considerable costs and time so it is always better to get things right from the start and establish who has an interest and how to protect those funds. At Wellers Law Group we can help you get it right at the outset but also guide you through, with expert Bank of Mum and Dad legal advice, when things go wrong.

Joint Ownership

When buying a property jointly with another person, whether the legal title (recorded at the land registry) is to be held by one person or not you may want to consider a Declaration of Trust. This is the best way to protect a financial investment either giving a third party like a parent or grandparent an interest in the property or protecting that gift from family as against the other person you are buying the property with so that the contribution remains yours on sale.

Are you buying alone but having someone to live with you?

If you are buying and intending to have someone live in the property who does not have any financial interest – for example, a lodger or even an unmarried partner – you need to consider either a tenancy agreement or a cohabitation agreement.

What if the person living with you is due to be your husband or wife?

A Declaration of Trust does not provide protection if it seeks to ring fence your interest without giving a third party a share. You should therefore consider a pre-nuptial agreement.

Is there anything else to consider?

There are also tax and estate issues to consider which we explore here.

Legal advice on family gifts, loans and joint mortgages

The property solicitors at Wellers Law Group can help with all the important legal aspects of buying a house with parents’ money.

Our Bank of Mum and Dad legal team can provide advice and practical solutions when embarking on any purchase that involves a family loan, a gifted deposit, a joint mortgage or the gifting of a house to a child.

If you would like to receive clear and authoritative advice, call us today. Alternatively, fill out an online enquiry form so that we may contact you.