In recent years, thousands of first-time buyers have turned to their parents for financial help to get onto the property ladder. The so-called ‘Bank of Mum and Dad’ has grown in size and is now the UK’s tenth biggest lender, providing more finance each year than the Clydesdale Bank.
An estimated £6.3 billion of assistance was provided by parents to help fund their children’s property purchases in 2018, with Legal & General research estimating that parents are lending or gifting an average of £24,100 to help their children.
However, experts have warned that calling it the ‘Bank of Mum and Dad’ is misleading, as many parents don’t ‘behave like a bank’. So, if you’re considering providing financial support to your children, here’s what you need to think about.
Families failing to formalise ‘Bank of Mum and Dad’ lending
Parents provide more than £6 billion of property-related financial help to their children each year without even discussing the basic issues. That’s the conclusion of mortgage experts who are urging parents to take legal and/or financial advice before entering into this sort of arrangement with their children.
In many cases, families do not:
- Keep a written record of transactions
- Discuss whether the money is a loan or a gift
- Agree arrangements for repayment
- Set out what would happen if a relationship breaks down.
A recent joint study by the London School of Economics and the Family Building Society found that three-quarters of survey respondents said that financial assistance was given as a gift, with 23% saying it was a loan.
Of those who provided loans, most (82%) were not charging interest and about two-thirds said they expected repayment as and when the beneficiary could afford it, rather than agreeing a fixed repayment schedule.
This failure to take advice and to formalise the transaction can have significant consequences. For example, there has been a substantial increase in the incidence of parents going to court to get their money back, with estimates suggesting 12-15 cases of this nature end up in court every month.
The Times recently reported a case where a couple spent £380,000 on legal fees following their son’s divorce as they did not want their former daughter-in-law to be awarded half of the £2 million home they had funded.
If you’re gifting the money
You can make either a formal or informal gift to your child. However, considering the likely size of the sum and the possibility that such an arrangement could be scrutinised by HMRC or other parties in the future, experts suggest documenting gifts and keeping the paperwork logged with your solicitor.
A concern that many parents have is that any money they gift might not end up with their intended beneficiary. You might make a gift to your child but, as in the example above, part of this gift might end up with an estranged partner or spouse.
There are several ways to tackle this issue:
- Preparing a Living Together Agreement (LTA) with the advice of a solicitor
- Arranging a pre-nuptial or post-nuptial agreement
- Ensuring a couple have valid and up to date wills.
By formalising the arrangement and taking these steps, you will benefit from the peace of mind of knowing your gift will remain with the intended beneficiary.
If your child is buying with another party
For many younger people, the only way to afford a property is to buy jointly with a partner. If you’re providing financial support as the ‘Bank of Mum and Dad’ there are issues here to consider.
Preparing a Living Together Agreement is something that parents should consider, particularly if your child is unmarried and buying with a partner. This is the case whether you are lending money, gifting funds or simply acting as a guarantor.
This also gives you the opportunity to sit down with your child and their partner and discuss (and record) the contribution you are making, and what will happen if the relationship were to end.
If your child also intends to allow another person (for example, a partner or friend) to live at the property, it is a good idea to create a Tenancy Agreement, as well as a Living Together Agreement, to set out the responsibilities and rights of each party.
As well as making it clear who owns the property, it also sets the expectations for meeting the costs of living and, importantly, what would happen if the relationship were to end.
Make sure you take advice
A recent joint study by the London School of Economics and the Family Building Society found that few parents providing financial support took financial or legal advice before giving/lending money to their children or drew up loan contracts or deeds of gift.
The study found that, whilst some transactions were specifically structured to achieve certain tax or inheritance-planning objectives, the general lack of advice suggests that these aspects are not always fully taken into consideration.
The research also suggested that, while there may have been a general expectation within a family that parents would provide some help, the details of how financial assistance would take place (loan vs gift, repayment schedule, what would happen if a couple split up) had rarely been worked out in advance.
It can pay to take both financial and legal advice to tackle issues such as:
- Whether the assistance is a loan or a gift
- The repayment arrangements if it is a loan
- Whether you as the donor have a say in what happens to the property or the right to use it yourself
- What happens if the beneficiary’s relationship breaks down?
- What happens if a parent dies?
- Whether parents will benefit from uplift in the property value.
Another sound reason to seek financial advice is to ensure that gifting or lending money won’t leave you financially vulnerable.
The LSE survey found that most parents were not worried about how a loan or gift would impact their own circumstances, with just 7% strongly agreeing, and a further 17% agreeing, that they were ‘concerned about the future effect on their finances’. However, gifting a substantial sum could have ramifications for your own financial security.
Get in touch
As we have seen, it can pay to take both legal and financial advice before you start lending as the ‘Bank of Mum and Dad’. If you want more information on how this may work for you and your family, please get in touch. Email email@example.com or call 01454 416 653.