BANK OF MUM AND DAD
The ‘Bank of Mum and Dad’ is now one of the top 10 mortgage lenders. Unsurprisingly, many young people look to family to enable them to realise their otherwise distant dream of becoming a homeowner. However, it is not only first-time buyers who are relying on handouts from family. A recent study suggests that a third of so-called ‘second-steppers’ (those looking to move up the property ladder) also rely on the ‘Bank of Mum and Dad’ to enable them to move to their next property.
In addition to the property issues, clients need to be aware of the potential family law issues that may arise if the transaction involves a couple.
A gift or a loan?
At the outset of the conveyancing transaction, you need to tell your solicitor how the purchase is being funded. If your parents are funding the deposit (or part of it), you will need to be clear whether the money in question is a gift or a loan.
In many cases, the money will be gifted. This is often done as part of estate planning: no inheritance tax is payable on the funds transferred if the person making the gift survives for at least seven years afterwards (gifts made three to seven years before the donor’s death are taxed on a sliding scale known as taper relief). Also, if the buyer requires a mortgage in order to purchase a property, it may be difficult to find a commercial lender who will be willing to lend if the deposit is funded by way of a loan, due to the potential risk of the parent lender later asserting an interest in the property.
Where parents loan rather than gift purchase money to a child, they should obtain their own independent legal advice. When loaning money, parents may wish to formalise the terms on which the loan has been granted (to future-proof against any change in circumstances on either side) and safeguard the repayment of the loan by acquiring a security interest in the property. Additionally, parents may want to enter a restriction on the title to the property so that the property cannot be sold without their consent. The loan will need to be disclosed to any commercial lender lending against the purchase, and, provided that the lender consents to the loan, any security interest acquired by the parents in the property would be secondary to that of the lender.
The proper documentation of a loan from parents can also become important if the couple are married and later divorce: the documentation will provide clear evidence to third parties (such as a spouse on divorce, or rather a judge looking at the marital pot) that this is a hard debt with an expectation of repayment.
Parents do not need to be concerned that the grant of the loan to an adult child to purchase a property will bring the transaction within the additional / higher rates of stamp duty land tax, as any security interest acquired will be exempt for these purposes. Different rules apply if parents are assisting a child under the age of 18.
Assuming that the buyer is raising a mortgage in order to purchase a property and the money being contributed by parents towards the deposit is a gift, what information needs to be provided to the lender?
If the buyer is receiving a gift towards the property purchase, individual lenders’ requirements can vary but most lenders will ask that the person making the gift signs a declaration confirming that the money being provided is a non-refundable and unconditional gift, and that they have no interest in the property. The donor should also confirm their relationship to the recipient. However, while some lenders require conveyancers to report the gifted deposit to them, others simply ask that the signed declaration is obtained by the conveyancer and kept on their file, providing that other certain conditions are also met, including that the property is being purchased to live in and is not a buy-to-let, and the gift is from a family member.
Additionally, most lenders will require bankruptcy searches to be carried out (and come back clear) against all parties contributing towards the purchase price. Some lenders will also only accept gifted deposits where the person making the gift is a UK resident, and where the funds being provided are held in a UK bank or building society account.
Anti-Money Laundering requirements
Where there is a gifted deposit involved the solicitor will have to obtain identification documents in respect of whoever is gifting the deposit and conduct a documented risk assessment for each client, including establishing the source of the funds being utilised towards the purchase.
If the funds come from one discrete source, such as the sale of a house, a pension drawdown or the sale of shares, it will likely be easy to establish where the money has come from by checking the relevant documents (such as a copy of the completion statement and a copy of the relevant bank statement showing the money being received from the solicitor’s bank account). If, however, the funds have been accrued over a long period of time or emanate from multiple sources, it may take longer to verify the source of the funds. If money has accrued from savings, it may be necessary for the client’s parents to provide bank statements covering the complete period during which the money has been accruing.
Restrictions on who can give a gift – can a relationship be too remote?
It is up to the discretion of individual lenders as to who can give the gift. However, as a general rule, the remoter the relationship between the donor and the recipient, the less likely the lender will be to accept the deposit. So while most lenders will be happy to make a mortgage offer where the purchase involves a gift from a parent, spouse, cohabitee or child, and some will be comfortable if the gift is from a remoter blood relative (such as a grandparent, sibling or aunt), very few, if any, would accept a gift from an unrelated third party such as a friend or an employer.
This is because of lenders’ concerns regarding fraud and money laundering. The logic is that while it is understandable why a parent or relative would wish to help their child onto the property ladder, it is harder to understand why a friend would wish to do so, unless they either were getting something in return, such as an interest in the property, or were involved in money laundering.
Family law issues
Family law issues may not be at the forefront of clients’ minds in relation to property purchases. However, if you are married or in a cohabitating relationship (or intend to marry or cohabit in the future), there is a risk that the property (including any equity funded by parents) could be the subject of claims on divorce or relationship breakdown. If that is the case, a family lawyer will be searching for clues in the conveyancing file as to intentions around ownership. It is therefore important that you and your solicitor discuss any potential family law issues that may arise in relation to your property purchase and the options that are available to protect parental contributions. You may be referred to one of our specialist family practitioners at the time of purchase.
Cohabitating relationships are equally at risk of ending in separation. However, unlike with married couples, there is no statute governing the rights of cohabitees when their relationship ends and, save where there are minor children, the property rights of cohabitees are governed by property and trust law, not family law.
If you are cohabitees who are purchasing a property together, you will be asked whether you wish to own the property as joint tenants or as tenants in common. If one of you is funding the deposit by way of a gift from your parents, you need to understand that:
- a) you have the option of entering into a declaration of trust specifying the proportions in which you own the property (which can then reflect the greater financial contribution of one of you due to a gift from parents); and
- b) without a declaration of trust specifying otherwise, the court’s assumption will be that a couple own the legal title in equal shares.
Where a couple do not expressly declare their respective beneficial interests in the property on purchase, there is also a risk that one of them will later argue that their ownership of the property has changed.
If you choose to purchase the property as joint tenants or as tenants in common with equal shares, even though one of you has made a greater financial contribution, you will be asked to explain this to your solicitor, to prevent any complaints down the line.
In addition to entering into a declaration of trust, there is also the option of cohabitees entering into a cohabitation agreement which states what the couple’s respective beneficial interests in the property should be. A cohabitation agreement is particularly useful where a client is in a cohabitating relationship but purchasing a property in their sole name with the help of their parents. In this scenario, you will likely want to ensure that there is no risk of your partner acquiring an interest in the property – for example, if they contribute towards the mortgage or to works done to the property.
If you would like to enter into a cohabitation agreement, we will be happy to refer you to one of our specialist family practitioners.
Typically, the family home is regarded by the English family courts as matrimonial property, due to its central role in the marriage. More often than not (especially if there has been a long marriage), provided that parties’ needs are thereby met, the equity in the family home will be divided equally, even if one party made a greater financial contribution than the other, and whether or not that contribution was gifted by their parents – unless the parties have entered into a nuptial agreement.
The benefit of a nuptial agreement is that it can seek to ring-fence the gifted amount and protect it against future claims on divorce. The success of a nuptial agreement in protecting the money gifted will depend upon a variety of factors, including what other assets are available to the couple to meet needs on divorce, the length of their marriage, and the standard of living they enjoyed. As a general rule, the longer a marriage, the more likely it is that any such gift may become blurred into being regarded as part of the marital pot. However, since a recent landmark case the English family courts are ever more likely to uphold nuptial agreements – provided they are fair, there was legal advice and financial disclosure, and (in the case of a pre-nuptial agreement), it was signed at least 28 days before the wedding, to avoid later suggestions of duress.
Accordingly, if you are contemplating marriage or are already married and one of you anticipates being gifted money towards a purchase, we may suggest that you (and/or the parents of the spouse who is receiving the gift) consult a family specialist regarding the option of entering into a nuptial agreement before proceeding with the purchase.
You should also consider updating your will, to ensure that in the event of your death, the amount gifted either passes back to your parents or to any siblings or grandchildren, rather than to their spouse – providing, of course, that the property is held as tenants in common and subject to the provisions of the Inheritance (Provision for Family and Dependants) Act 1975.