The bank of mum and dad is an increasingly popular way to help first time buyers get onto the property ladder. It’s great that parents can provide life changing amounts of money to help their children, but often this method hits the headlines and not for positive reasons.
One case which stands out is a high court decision, which involved parents lending their daughter £90,000 to purchase a property, only to find that their daughter did not have to pay them back. The case was featured in national newspapers where it was reported that the parents, David and Glenda Joy, said that the £90,000 was a loan to their daughter but their daughter argued that it was a gift. Unfortunately for Mr and Mrs Joy this was only a verbal agreement and after a bitter court battle they lost their case. This not only led to the couple facing significant financial consequences but also the stress of a family breakdown.
It is becoming more common for younger people to receive the help of the ‘Bank of Mum and Dad’ to step onto the property ladder. However, before this happens it’s vital that mum and dad put the right documents and agreements in place to protect their finances and avoid family arguments.
How can parents help their children onto the property ladder and protect their finances?
There are a number of different ways in which parents can make payments to their children. These include:
- A loan – payment could be made via a loan however, as we’ve seen from Mr & Mrs Joy, it is better to sign a loan agreement which sets out the terms of the loan and makes it clear that the payment is not intended to be a gift, to avoid misunderstandings in the future.
- A gift – parents can make a gift to their child. Ideally this should be recorded and it’s worth noting that there may be inheritance tax to pay if the parents do not survive 7 years from making the gift.
- Declaration of Trust – parents could enter into a Declaration of Trust with their child to protect their contribution. This document can make clear the amounts contributed to the purchase and how the proceeds should be divided when the property is sold. However, it is important to consider any additional stamp duty land tax which may be payable if the parents already own a property of their own. This is also a useful document for a couple who are contributing unequal amounts to the property.
Before any payments are made, first time buyers should notify the conveyancer of any arrangements, if money is being loaned/gifted in relation to a property, so that appropriate advice can be given.
Circumstances can change over time, so it is better to have the agreement in writing to avoid any costly disputes in the future, if the family relationship unexpectedly breaks down.
For more information on protecting your finances when acting as the bank of mum and dad, please contact Aalia Ijaz in our Wills, Trusts & Probate team on 0161 475 1218. Or for advice on any property matters contact Kim Derbyshire in our Residential Property team on 0161 475 7604.