What you need to know about the Bank of Mum & Dad

In 2019, £6.5 billion was spent by parents helping their children onto the property ladder.  The Bank of Mum and Dad is now this country’s sixth largest lender.  No lender of this size would proceed without careful financial and legal advice, and we can help.

Although it is not new for parents to support children when making property purchases, the average amount gifted or loaned has increased by almost 30% in the past 12 months alone. For parents this represents a significant investment and they should consider the basis upon which they wish to make this contribution.

Setting the terms of a loan

If you want the money back at some stage, you need to be clear when and on what basis. You should consider the following:

• What are the terms of the loan?
• When should the loan be repaid?
• Do you want to be paid interest and if so at what rate, andwhen should it be repaid?
• What happens if either of you die and the loan is outstanding?

Rather than expect the capital back when the property sells, should you retain an interest in the property so that you benefit from property price increases? If this is the case, who will pay the mortgage? Who will keep the property in a good state of repair?

Action points:

It is advisable that if you are retaining an interest in the property you sign a Declaration of Trust with your child and agree the ground rules.  We can prepare this for you from £275 plus VAT. 

If you are lending the money, independent of the property purchase, you will need a simple Loan Agreement. We can prepare this for you from £175 plus VAT. 

Protecting gifts on death, separation, or divorce:

Many parents are prepared to make gifts to their children, but when asked about the child’s partner or spouse inheriting the cash gift on death, separation or divorce, many think again.

How do you protect the gift from divorce or separation from their partner who co-owns the property?

Action points:

We would recommend that your child signs a declaration with the co-owner of the property so that if the property is sold because of a relationship breakdown, your child recovers the cash gift first before the proceeds are divided.

We would also recommend that your child puts in place a will directing where the money would go on his/her death. It would be advisable in any event for a new owner of a substantial asset like a flat to sign a will. It may be that you would suggest that the gift you have made is paid to a sibling.

Ensuring that all children are treated equally.

Do you want to make sure that your other children are treated equally but cannot afford to make equivalent cash gifts now?

Action points:

You could sign a will directing that gifts made in your lifetime are taken into account  on your death (or on your and your spouse’s death) so that your children are all treated equally at the end of the day/(end of your days!) 

Next Steps

We deal with these issues regularly and would be pleased to hear from you to assist you in structuring the gift or loan effectively to ensure that you, your child and your family are protected against all eventualities.  We may need to advise you on tax and estate planning issues as lifetime gifting can lead to additional capital gains tax, inheritance tax and stamp duty costs. 

Lucy Gordon is a Director at Spratt Endicott & Head of the Private Client Practice; she is a member of Solicitors for the Elderly and a Legal 500 recommended Lawyer.    To discuss any aspect of this article please email Lucy at lgordon@se-solicitors.co.uk. 

 *Disclaimer: While everything has been done to ensure the accuracy of the contents of this article, it is a general guide only. It is not comprehensive and does not constitute legal advice. Specific legal advice should be sought in relation to the particular facts of a given situation.