With parents lending an average of £17,500 towards their child’s first purchase and being involved with over 300,000 property transactions during 2017 alone the Bank of Mum and Dad is playing a significant role in funding the UK’s residential property market.
What are the risks?
For many parents approaching this issue, it may seem like a straight forward procedure. Hand over the money to their offspring and turn up to the house-warming party 3 months later! In actual fact there are a number of issues that should be considered before writing out a cheque.
If your child is buying with a partner or decides to marry in the future the parent should consider who is likely to benefit from their ‘step up’ onto the property ladder. If a relationship fails at a later date and the property needs to be sold, where and how will the proceeds from that sale be divided and will the parents see their money again? Very few people want to simply hand over cash which may not stay in the hands of family members.
Parents making contributions need to think about protecting their investment, which can lead to all sorts of legal complications. Different circumstances lead to different legal risks.
Currently in England and Wales, couples who live together have no financial obligation towards one another. Any disputes over ownership of property is dealt with under trust law. Very broadly speaking, if a property is in joint names, it will be owned in equal shares unless there is written evidence to the contrary. If a property is in the name of one party, the other will need to prove they made financial contributions toward the property in circumstances which give rise to a trust.
Alternatively married couples have a whole range of financial obligations and responsibilities between them. Whether a property is owned in one party’s sole name or in joint names is usually irrelevant when deciding how to divide assets in the event of divorce.
If parents don’t intend to gift money to their offspring they need to think about setting up formal trust agreements or loan agreements. This may complicate matters when looking to raise a mortgage, but it will provide peace of mind and protection for those lending money. However, if the money is gifted, parents should encourage their children to think about the legal ramifications if they are involved in relationships