The bank of Mum and Dad
Currently over 80% of first time buyers get financial help from their parents. It is often the only way young people can afford to buy their first home.
This is often by way of a gifted deposit and while the principle is simple, structuring it can be far from that.
With conveyancing rules and procedures changing frequently, it’s getting harder and harder for money to exchange hands when you are looking to buy a property. Money laundering through property is a major problem, some of the warning signs of money laundering through the property market include cash-only buyers, payments from a number of different individuals or sources and funds provided by one person and registration in another person’s name.
Gift or Loan
Whilst borrowing money from family is common when buying property you may think how the money is given doesn’t matter, because you are family, however if you are getting a mortgage then you’ll need to be clear on who owns the money being used to buy the property. Your mortgage lender needs to know if the money is a gift or a loan. The reason for this is simple, they want to know if anyone else is going to have a claim over the title of the property they are lending a large sum of money on.
Mortgage lenders do not want to have challenges from parents if they have to repossess and sell the property. In the mortgage lender’s eye, they’ll want to know they can repossess, sell the property and repay their loan without anyone else claiming there is money due to them. If it is a gift, the mortgage lender will need a letter confirming this. If it is a loan then the mortgage lender needs to confirm they are happy for a 2nd charge to be registered against the property. Often mortgage lenders do not allow this, especially if it is a high loan to value mortgage.
Loans – Should you Draw up a Contract?
As a recent case illustrates, it is essential that a contract is drawn up stipulating the full details of any loan from the Bank of Mum and Dad. In a case widely reported in the press, a retired couple re-mortgaged their Cornwall home to provide their daughter with £90,000; the sum was used to cover legal fees for a property inheritance dispute and allowed the daughter to secure a home left to her by her grandmother. The parents believed they could “trust their own daughter” so they did not draft any formal legal documentation. When they later sought repayment on what they insist was a loan, the daughter refused countering that she believed the £90,000 to be a gift. The court agreed with her and as a result the parents lost their home.
Tax Implications of Gifting to Children
One point to note is that if your parents die within seven years of making a monetary gift, the money will be treated as part of their estate and may be subject to inheritance tax. Parents can give up to £3,000 per year which will not be counted for inheritance tax. In addition, in a year in which their child is getting married, they can give a further £5,000 and the same rules apply.
Setting up a Trust
One way parents can help their children in buying a property is by setting up a trust, they can avoid paying capital gains tax and inheritance tax when they buy a home for their child. The child will be able to live rent-free as an adult and will eventually inherit the property.
Setting up a Deed of Trust
Relationships can and do end. This can problematic where gifts are concerned especially when they have been used by a couple to buy property. Parents naturally want to be sure that assets ‘follow’ their child in the event of relationship or marriage breakdown, but this may not happen without the proper contract in place. A Deed of Trust sets out how money has been contributed towards the purchase of a property, and how it should be recovered in the future. This means sums can be effectively ring-fenced, so that gifts made by parents will go to their child (rather than being shared with the child’s spouse) in the event a relationship breaks down and the property is sold.
Reliable Legal Advice
No-one can see the future and if parents are funding their children in any way, it is important that they have a clear understanding of their own expectations regarding the money. If the sum is a loan, and they will need it repaid for their own financial security, then they MUST seek legal advice and draft a contract with terms of repayment. Sadly, financial and romantic security is never set in stone and situations change. What feels right in one moment may turn out to be a foolish, and costly, mistake in another. Legal advice is never a bad idea when it comes to Bank of Mum and Dad financial security.
Contact
Please contact our experienced and approachable team who can advise on your options in relation to property, inheritance and trust matters. Contact Hayley to make an appointment on 0191 243 8167 or email her at hayley.baker@davidgray.co.uk
