The Bank of Mam and Dad: A helping hand with hidden legal risks

The Bank of Mam and Dad: A helping hand with hidden legal risks

Claire Simmons, Residential Property

It’s tougher than ever for first-time buyers to get onto the property ladder. The average age of a purchaser continues to rise, saving for a deposit is increasingly difficult, and the combined pressures of the cost-of-living crisis and fluctuating mortgage rates have created significant barriers. While there were signs that interest rates might begin to ease, ongoing global instability has kept the mortgage market unpredictable, with rates shifting rapidly.

Against this backdrop, it’s no surprise that many parents are stepping in to help. The so-called “bank of mum and dad” has become an essential source of funding for many first-time buyers. Whether it’s a contribution towards a deposit or covering the full cost of a property purchase, including legal fees, stamp duty and other disbursements, family support can be invaluable.

However, as Claire Simmons, Residential Property Partner at Hay & Kilner, explains, such generosity can come with unintended legal, financial and emotional consequences if not handled carefully.

Loan or gift: getting the basics right
One of the most important considerations is establishing whether the financial support is a loan or a gift. This distinction is crucial, particularly when a mortgage is involved. Most lenders require clarity on the source of funds and are generally reluctant to proceed if the money is structured as a loan, as it may affect the buyer’s ability to repay their mortgage.

If the contribution is intended as a gift, it is essential to formalise this through a gifted deposit declaration. This document confirms that the parents have no legal interest in the property and relinquish any control over the funds. While this may seem straightforward, it can have significant implications if expectations are not clearly aligned from the outset.

Planning for the future
Even when money is given as a gift, it’s important to consider what might happen in the future. What if the property is sold? What if your child remortgages or decides to add a partner as a co-owner? Without clear agreements in place, including a co-habitation or where appropriate a pre-nuptial agreement parents may find themselves with no recourse to recover their contribution or protect their interests.

For those who wish to retain some level of financial protection, a Declaration of Trust, could be an option. This legal document sets out the respective interests in the property and could help to “ring-fence” the parents’ contribution. It can also specify whether any repayment should reflect the original amount or a proportionate share of any increase in the property’s value.

Having said that, this may not withstand the test of the courts should the child marry and then subsequently obtain a divorce and as such a cohabitation agreement.

Registering such arrangements properly ensures that all parties understand their rights and obligations, helping to avoid disputes later on.

Stamp duty and tax considerations
The structure of financial support can also have tax implications. For example, If a parent was looking to co-own a property with their child then their child could inadvertently lose their first time Buyer relief and their could be Capital Gains Tax consequences for a second home for a parent.

Inheritance tax is another important factor. Gifts made by parents may fall within the “seven-year rule,” meaning they could still be considered part of the estate if the donor passes away within seven years of making the gift. This could have implications for estate planning and tax liabilities, particularly if not properly documented.

Family dynamics and fairness
Beyond the legal and financial considerations, there are also important family dynamics to take into account. Providing financial assistance to one child may raise questions of fairness, particularly if there are other siblings who may not receive the same level of support.

Without clear planning, this can lead to complications when it comes to inheritance. For example, a child who has already received a substantial gift towards a property purchase may effectively benefit twice if no adjustments are made in a will. Setting out intentions clearly, both legally and within the family, can help to manage expectations and prevent disputes.

Relationship breakdowns and unforeseen risks
Another key consideration is the impact of relationship changes. If your child enters into a marriage or long-term partnership, their spouse or partner may acquire rights to the property. In the event of a separation or divorce, this could put the parents’ financial contribution at risk.

Similarly, unforeseen circumstances such as bankruptcy or death can create complex legal challenges if no formal agreements are in place. Executors of an estate may not be aware of informal arrangements, potentially leading to confusion or disputes among beneficiaries.

The importance of early legal advice
The common thread running through all these scenarios is the importance of seeking legal advice early in the process. Engaging with legal experts at the start of a property search allows families to explore the available options and put appropriate safeguards in place before any money changes hands.

At Hay & Kilner, specialists across property, wills and probate, and family law work together to provide a comprehensive approach. By addressing potential issues proactively, families can avoid costly and emotionally draining disputes further down the line.

A well-intentioned gesture, done properly
Helping a child onto the property ladder is a generous and often life-changing gesture. But without the right legal framework, it can lead to unintended consequences that affect both finances and family relationships.

By taking the time to clarify intentions, formalise agreements and seek expert advice, parents can ensure their support achieves its intended purpose, providing a secure foundation for the next generation, without creating complications for the future.

Get in touch to find out how we can help.