Divorce and the Royal Bank of Mum and Dad

House Purchase

New research shows that UK parents lend their children staggering amounts of money a year to help them on to the property ladder. But what do you need to know before making that bank transfer?  

According to new data from Legal and General, British parents will lend their children a total of £5bn a year to buy a home in 2016, making the Bank of Mum and Dad one of the top ten mortgage lenders in the UK and responsible for some level of finance in a quarter of all purchases. Indeed, parents are set to provide an average of £17,500 for an estimated 300,000 mortgages. Grandparents are chipping in too, with an estimated 22,500 purchases supported by the older generation.

The problem is, what happens when your son or daughter uses the money to invest in a property with their partner or spouse?  Suddenly, the gift that was meant for your child becomes an asset that may have to be divided as part of a settlement in the event of relationship breakdown.

So, before you set up shop as “the Bank of Mum and Dad”, it’s important to speak to a professional about the implications such a loan/gift could have on the whole family’s future and the best way to manage your contribution.

You might choose to give a lump sum as a gift; as long as you live for 7 years after making the gift no inheritance tax will be paid.  The problem with this approach is that the gift can then be subject to division if the relationship breaks down as it is then seen as an asset of your child, not you.

An alternative is to lend the money to your child and document the transaction by way of a Declaration of Trust. Whilst this may not be a tax efficient method, as it may be subject to 3% stamp duty surcharge upon purchase and Capital Gains Tax upon sale, it is a method to keep it out of reach from a third party on divorce.  A Declaration of Trust allows parents to retain an interest in the property to the value of the lump sum provided, meaning this amount is not available for distribution upon divorce.

Another useful document in such circumstances is a Pre-nuptial Agreement.  This is a statement by the parties, of their intention as to what is to happen to the asset in the event the relationship breaks down. Whilst you cannot completely assume the courts power with regard to financial settlements on divorce, this document can heavily influence any decision reached.  Lump sum payments from parents made prior to marriage can be ring fenced by the parties entering into a Pre-nuptial Agreement, confirming that the lump sum is not to be shared in the event of divorce.

Post-nuptial Agreements can also be of assistance where money is being provided to a couple during the course of the marriage i.e. to assist with moving to a larger property, school fees for grandchildren, renovations to an existing property, etc.  The Supreme Court upheld that if all the appropriate criteria have been met in the preparation of a post-nuptial document, it will be binding on the basis that, unlike a pre-nup, there is seen to be no duress as the parties are already married.

Pre-nups and Post-nups are useful when a gift is made to a child but parents want to protect it from any claim by a third party. A Declaration of Trust on the other hand, is useful when the money is loaned and not gifted to a child with a view to having the money paid back i.e. when a property is sold, or where parties are co-habiting and there is an unequal contribution to the purchase price.

These alternatives may not appear to be the most heartfelt way for parents to help a child get on the property ladder; however, failure to have the appropriate documentation in place can result in very complicated and costly arguments in the event of relationship breakdown.