The Bank of Mum and Dad

So one of the children is going to move in with their partner and has seen the ideal property but the deposit is slightly out of their financial reach.

After a quick discussion, Mum and Dad are considering helping out. What should the parents and the children be thinking about to secure this gift or loan so that it achieves what the parents had wanted when making this money available?

It is advisable to think very carefully about how this perhaps quite substantial amount of money is paid. If it is going to be a loan then it is more than likely it will be loaned to the couple so the parents should consider having a formal loan agreement drafted, and registering a charge against the property which is akin to a small mortgage. These will protect their investment and ensure that the terms of the loan are known and clear. It also allows the parents and couple to be clear on when repayment is to be made and if/what interest on the loan is payable.

In such circumstances the couple will need to think how they own the property and if one is putting in a larger capital deposit than the other then they might wish to own the property as Tenants in Common which permits unequal ownership of said property. This ensures that upon sale, the larger capital contribution is paid back to the payer before the remainder of the sale proceeds are split.

If the parents decide to make a gift of money to assist a house purchase then they need to consider whether they are wanting to help just their child or in fact the couple. The reality is that they usually make the gift to help their own child but many parents would not necessarily want the other person to benefit from their generosity in the event that the relationship fails. So it is important for the initial gift to be noted as a specific contribution coming from the child’s family which should be credited to the child in the event of a relationship breakdown.

For this to happen a number of steps need to be taken. If the couple are not married they must consider having a cohabitation agreement drafted or if they are to be married a pre-nuptial agreement which sets out who is to take what in the event of a relationship breakdown and how they are going to conduct their financial lives when they are together. If such agreements are properly drafted and entered into they are highly likely to be enforceable. They will need also to buy the property as Tenants in Common so that their unequal ownership of the property can be properly recorded. In this way the money provided by the parents can go to their child should the relationship fail.

If none of these steps are taken and the property is bought as a Joint Tenancy with the couple owing the property in unspecified shares then upon a relationship fail it would be open to the now ex-partner to argue that any proceeds of sale should simply be split 50/50 between them! This outcome may well not be what the parents or their child would want, so the correct steps taken before the money is gifted or loaned will certainly pay dividends.

Given the difficulty of getting a first foot on the property ladder, gifts or loans of this nature feature regularly in purchase arrangements. However, they must be carefully discussed and considered before any money is handed over. Steps taken to ensure clarity at this juncture can ensure that practical help given out of love and concern does not become the focus for fierce future discord.