The Bank Of Mum And Dad
In 2019, the average parental contribution for home buyers was £24,100, according to Legal & General. Collectively parents have given £6.3bn to their children to enable them to purchase a home. This means that “the bank of mum and dad” ranks in the top ten mortgage lenders in the UK.
Parents, or grandparents, often use their savings, cash, equity release from their own homes or even their pension pots to help their children financially. However, if you or your clients are planning on helping your children financially, it is important you are aware of the legal and tax implications of doing so. Worryingly almost half (44%) of parents or grandparents who gift money to their children did not take any advice before gifting the money*.
What Happens To Mum And Dad’s Money If Their Child’s Relationship Fails?
As a starting point, money that is gifted is likely to be considered “matrimonial” property. This means that if their child divorces, the gift may be shared with their partner. Their partner may even get more than half if their needs warrant it. It is possible that the gift may be “ringfenced”. However, if the money has been “mingled” (e.g. used to purchase the family home in joint names) it is more than likely to be shared.
If The Child Isn’t Married, That Means The Money Is Protected, Right?
Wrong! A Cohabitation Agreement setting out how the money can be dealt with in the event of separation can avoid parents being drawn into Court proceedings.
How Can Parents Protect Their Money?
There are a number of options;
- Ensure there is a Pre or Post Nuptial Agreement;
- Purchasing the property as a co-owner with their children;
- Registering their interest on the title deeds of the property;
- Put the gift in a Trust;
- Give the money as a loan rather than a gift.
A loan agreement must be properly drawn up. Don’t rely on an oral agreement. A written record may not be enough unless it covers certain formalities.
Pre and Post nuptial Agreements, Cohabitation Agreements and Trusts are commonly used to “ringfence” assets and keep them out of divorce proceedings.
A Declaration of Trust can be drawn up by lawyers to record the contributions each party has made to the purchase of a property.
Is It Too Late If Parents Have Already Given Money To Their Children?
Not always. It may still be possible to “ringfence” the monies. A Post Nuptial agreement could be drawn up when a couple are already married. However, it will be difficult to ringfence money after your child has separated.
Are Pre And Post Nuptial Agreements Legally Binding?
Technically, no, but they are usually upheld by the Courts if they meet proper legal criteria (both parties have legal advice, there has been full information given of each party’s financial circumstances and they are not manifestly unfair). Having such an agreement may save substantial legal costs in the long term. Pre and Post Nuptial Agreements are not just for celebrities; they can protect and preserve all sorts of assets, including family gifts, inheritances and shares in a family business.
The key is preparation – seek legal advice as soon as possible from a specialist family lawyer. If you are considering supporting your children/grandchildren or other family members very careful consideration should always be given as to how that money is protected against the possibility of relationship break down.
If you want to protect your financial gift or have clients who would benefit from some legal advice, then please contact a member of our team below.
*August 2019, Legal & General Assurance Society Limited