The Bank of Mum and Dad
It’s a common phrase these days. The younger generations are struggling to get on the property ladder much more than was the case a few years ago, and their parents and often keen to help them.
If you are fortunate enough to be in a position to give them that help, that’s fantastic for your kids, and I’m sure you will feel great about it, but there are things both the parents and the offspring they are helping should be aware of to make sure that this is a smooth and safe transaction.
You all need to know what you are getting in to, and, possibly more importantly, what you are going to get out of it.
The most important issue to consider is whether the money is a loan, a gift or whether the parents are buying a share of the property.
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If it’s a loan, what are the terms on which the parents can ask for the money back?
It’s a good idea to set out at the beginning what the important terms are such as whether only the original amount of the loan is being repaid, or whether there will be any interests and/or costs on top. If the parents are dependent on the money for their retirement, then they need to make sure that it at least keeps pace with inflation.
If interest is going to be payable on the loan, at what rate is it payable, or is it going to relate to the increase in value of the property. If so, does that mean that it could go down if property prices go down?
Both sides should also agree on when the loan has to be repaid. Is the loan for a fixed period of time, or when an event happens, such as if the property is sold. If there is no specific time frame, then the loan is automatically repayable on demand. So at any point, mum and dad can ask for a repayment which has its downsides.
I know that many parents out there are reading this are saying that they don’t really care when the money comes back, and if the kids need it for longer, then that’s fine. BUT, if there is nothing in writing about when the loan is repayable, and something happens to mum or dad (such as one of them is made bankrupt) then the trustee in bankruptcy can come along and demand the money back immediately and there will be nothing in place to stop them.
You might also want to consider what happens if things change. Right now mum and dad are helping their kids and their kids’ spouse buy the property of their dreams, and that’s great. Ten years from now, when the wonderful daughter in law runs off with the window cleaner, will it be so great if they get half the house that the parents helped pay for?
A loan agreement gives the parents the right to claim the money back if you want to.
So having a loan agreement can be both for mum and dad’s protection, and it can be for the protection of the kids too.
You also need to consider how to protect the loan, to make sure that the money is repaid when the time is right. In addition to having a loan agreement between the parents and the offspring, we would also recommend that it be recorded at the land registry as a charge, and that it be recorded in your Will.
That may sound surprising, but there is a good reason for it. Let’s say, for example, that a couple have two kids, and the parents help one buy a property with a loan that isn’t repayable for 20 years. In their will, the parents should say what provision they are making for the other child, taking that loan into account. The parents have the right, for example, not to make any provision for the other child, but it’s always better to set out their reasoning to reduce the risk of their estates being challenged. Or the parents might be lending one child £50,000 to buy a property, so they might say that the other child gets an extra £50,000 inheritance, but that also the loan is written off, so everything is fair, even and clear.
If the money is actually a gift (ie you don’t expect it back) then it’s important that this is also set out in writing. That the parent is giving the child a specific sum of money, and that they do not expect it back. There are obviously downsides to doing this, such as the divorce scenario set out above, but that, of course, is entirely up to the parent.
One of the biggest risks to making a gift of this type without making it clear the terms on which it is being made, is what could happen if someone challenged the transaction afterwards.
For example, in the bankruptcy scenario we outlined above, if there isn’t clear evidence that the parent never expected the money back, the trustee in bankruptcy could try and reclaim the money. All the parties need to do is put something in writing to the effect that it is a loan, and the parent doesn’t expect the money back, and sign and date it, and make sure the paperwork is available to others if necessary, such as with your solicitor, or with your will.
This is also something that we would suggest is covered in all relevant wills, for the reasons set out above.
A third option is that the parents buy the property with their offspring, so that they are all co-owners. That doesn’t mean the parents have to live there, but it does mean that they own a share of it. This means that the parents don’t get your money back until the property is sold, but they could force a sale if they had to.
It does mean that when the property is sold, the parents would get a share pro rata of any increase (or decrease!) in property prices. Often we find that parents do this where the child might have trouble getting a mortgage on their own, so they would be on the mortgage too. This means that even if it’s agreed that the child is paying the mortgage, if they miss a payment, the parent is responsible, and this could affect their credit rating too.
So being a co owner can have significant benefits, such as taking advantage of a rising property market, but also contains an element of risk. The child is also at risk if anything should happen to the parent, such as death or bankruptcy. We can’t do anything to prevent someone going bankrupt, but you can put something in your will to say what should happen to their share on death, such as giving it to the child in question.
If this isn’t dealt with, in the event of their death, the parents’ executors could be forced to make the child sell the property to realise their share.
Whichever option you go for, make sure you take tax advice. All of these options will have tax implications for all parties involved. For example, if a parent gifts the money to their child, and then dies within 7 years of the gift, the money may be subject to inheritance tax.
If you co own the property, and when it’s sold you make a profit, that profit may be subject to capital gains tax. If any party already own their own property when they decide to buy a property with their child, they will have to pay higher stamp duty on the transaction.
As we want the process to be as smooth and easy as possible, if you are thinking about helping your child out financially, or if you are fortunate enough to be getting help from mum or dad, make sure you consider the options and consequences as soon as possible so it doesn’t hold up the purchase.
We can help you with this so please call us if you have any questions.
If it’s a gift, get advice from an accountant as to what the tax implications of that gift are and how it might affect any other financial steps you are taking.
Disclaimer – our articles are designed to give you guidance and information. There is no substitute for proper direct advice, particularly as everyone’s circumstances are different. If anything in this article may affect you, please contact us for advice that is specific to your circumstances.