It is increasingly difficult to save for a deposit whilst paying rent and outgoings on a rented property. Lenders are now far more cautious about how much they will lend and who they will lend it to. As a result parents are regularly stepping in to help out their children to purchase a property.
When your son or daughter is in the process of buying a house, and you have the available funds to assist, why wouldn’t you help? They may be buying on their own or with a partner. Or they may buy on their own and then their partner might move in, they may get married subsequently. It’s a difficult matter to raise and at the start of a cohabitating relationship it could be awkward, but as parents it is very helpful to question whether the money was gifted or loaned. Is there any expectation that the money would come back to you or at least remain in the family? If the relationship between your child and their partner came to an end would you be happy with that ‘gift’ being split between them? Would you mind if it benefited them both in the future in those circumstances?
If the intention is that the money is a loan and should be repaid, then how are the terms of repayment defined? As family lawyers we deal with people whose relationships are coming to an end, either married or unmarried, and it is a regular occurrence that during the relationship monies have been loaned or gifted by parents. Whether there was a gift or a loan, can be a large and expensive source of disagreement. Parents may be asked retrospectively to confirm in writing whether they expected repayment and ultimately a court may be asked to decide that point.
Such disagreements and expensive legal arguments can be avoided if intentions have been recorded clearly at the time of the gift. It is always advisable to record them in writing. If monies have been loaned or gifted specifically to assist with the purchase of a property, then those loaning the monies can ensure that they will be repaid by entering into a declaration of trust. This is a document, effectively behind the scenes, which sets out amongst other things how the proceeds of sale should be divided in the event of a sale. Therefore the legal title as registered at the Land Registry could show that the title is in the name of Miss X and Mr P, but the declaration of trust will provide for the interest of the parents. For example if the parents of Miss X lent £50,000 to allow Miss X and Mr P to buy a property, a declaration of trust could record that on the sale of the property after payment of any mortgage, the £50,000 would be returned to the parents before any monies were distributed to Miss X and Mr P. In the alternative the parents could register a charge against the property, which if there was a mortgage, would come in priority after the mortgage and would ensure that in the event of the property being sold the amount charged would be repaid and could include interest on the initial amount loaned.
If the intention was that the money would be repaid the parents could have a loan agreement drawn up. This would set out the terms of the repayment, and is particularly helpful if the intention was that the monies would be repaid before the property was sold and by both parties. This would also be necessary if monies had been loaned for something other than the purchase of a property, maybe to pay towards a business venture etc.
If the money was a gift that the parents didn’t want to pass to Mr P in the event of the breakdown of the relationship, but wanted their daughter to retain it, they could ask their daughter to enter into a declaration of trust recording the fact the first £50,000 would be paid to her in the event of the property being sold.
Without any written record of the express intentions of the parents loaning or gifting the money or the parties as to how it would be divided, there could be a long and costly dispute in the event of a separation and no guarantee that the monies would be recovered.
If Miss X and Mr P were already married at the time of the gift or loan, the parents would be able to protect themselves in terms of a loan, by registering a charge against the property and/or by entering into a loan agreement. These documents would need to be in place before the monies were loaned. A declaration of trust would carry less weight if the daughter and son in law were married.
In the event that Miss X and Mr P were about to get married and the money was a gift to Miss X then the parties could enter into a pre-nuptial agreement protecting the gift and separating it from other matrimonial assets.
Without any clarification as to whether the money was a loan or a gift, there would be a real risk that the monies from the parents would simply fall into the matrimonial asset base and in the event of a divorce the starting point is a 50:50 division of the capital. There would then need to be costly legal arguments as to whether money was loaned. In extreme cases the parents might have to join the financial proceedings to try and recover the monies loaned. This would be a very expensive and arduous process and would only seek to increase conflict.
Disputes can be avoided or minimised if there is clear written evidence as to what was intended at the time monies were given or loaned. Whilst there is a cost involved, the cost in recording these matters in writing at the outset is considerably less than the costs in disputing them in the future.