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Bank of Mum and Dad

21 Sep 2015

Many parents will consider lending or giving money to their child to use as a deposit to purchase a property. An advance on their inheritance some might say. Often little consideration is given to the terms on which the money is provided, the excitement of purchasing their child’s first home taking priority. This area is, however, fraught with difficulties. All parties must think through the consequences and take appropriate advice before any money is provided.

Typically there are three ways for parents to help their child: an outright gift, an interest free loan or as an investment. The first and last have tax consequences.

If money is provided as an outright gift, should the parent not survive 7 years, the gift may be subject to inheritance tax. If money is provided as an investment, then depending on the circumstances, the parent may have to pay Capital Gains Tax if the value of their capital investment increases.

In all circumstances it is vital to reach an agreement and establish a formal legal document to prevent confusion and distress in the future, especially if circumstances change. People naturally don’t like to think the worse will happen, so don’t plan for it. All eventualities should be considered at the outset, so everybody is clear what will happen should the worst occur in the future. Consideration should be given to the following questions: What happens if any party dies? What if the child marries? What if the child and their spouse/partner separate or divorce? What if the parent needs the money back?

If the worst should happen and the child died before the parent, the parent could find the money is inherited by someone they don’t feel should receive the money. If the child didn’t have a Will, under the Intestacy Rules the money may find its way back to the parent. If the gift had been part of the parent’s Inheritance Tax planning then the return of any such gift could undo this.

Parents also need to consider whether they would have sufficient funds to live on after the gift is made, including whether they would have funds to obtain care at their preferred care home should they need it in the future. Parents should therefore consider whether a gift is the most appropriate way to provide the funds, or whether they should retain some entitlement to the money by providing it to their children as a loan or as an investment in the property.

Most parents will consider what should happen if their child separates from their partner, accepting there is a big difference between giving or lending money to their child if they are married or starting up a home with a partner. In these circumstances the risk of “losing” some or all of the money increases considerably. In the absence of a formal legal agreement, parents could find that an informal agreement about the money is superseded or overruled, either with or without the child’s consent. How the child and their partner choose to hold the property purchased could have an immediate effect on such an agreement. In these circumstances it is critical to obtain legal advice, so as to ensure all eventualities are considered. Protecting the money provided in these circumstances will also provide protection should the child or their partner become bankrupt.

The same consideration needs to be given by partners purchasing property with disproportionate amounts of money.

The consequences of failing to reach an agreement and properly documenting that decision now could result in a dispute arising in the future, which is often time consuming and costly for all parties. The parties also risk the possibility that a Court may decide who is entitled to the money in a way that differs from that which the parties intended.

For further information, please contact Paul Illes, Associate Solicitor at Hay & Kilner.

Call: 0191 232 8345

Email: Paul.Illes@hay-kilner.co.uk