Beware the Bank of Mum and Dad: following divorce

As a family lawyer, I see many cases where one of the parties have received a significant sum of money from their parents; often when buying a home. 

Unlike a mortgage however, money that comes from “The Bank of Mum and Dad” is not necessarily repayable.  Further and to the consternation of many clients and their parents, that money may not be safe from a claim by the ex-partner of the son or daughter it was really intended to benefit.

I would imagine that gifts and loans from parents are becoming more and more common, not just because of the ever-increasing costs of further education, but also as a result of the buoyant housing market we are seeing at present.  On top of that, I would imagine there is some excess cash hanging around right now, as expensive holidays and other costly social events have been repeatedly sabotaged by the pandemic.

Money given intended as a loan?

If the money given by parents to assist a house purchase is intended to be a loan, then it is crucial this is formally recorded and signed by the parents and the child (and if relevant their partner), to reflect they are all in agreement as to exactly what will be repaid and in what circumstances. 

Whilst it is legally possible to have an oral agreement, it would be very easy for such a conversation to be “forgotten” or denied.  I would therefore strongly recommend that if you are a parent looking to help your child with their first step on the property ladder (or any other expensive life event), you carefully consider instructing a solicitor to formally record the money you are lending and how and when it is to be repaid.  

Doing so should also help to safeguard the money loaned in the event of the child’s future bankruptcy.

If the money is being given by the parents as a gift, the situation is a little more complex:

Example of money given as a gift:

Fred and Wilma give their daughter Pebbles £50,000 to buy a home with her boyfriend Bamm Bamm. Fred and Wilma really intend this to be a gift to Pebbles but are happy that their daughter has found a nice boy and settled down, so never make it clear that the money is a gift to Pebbles alone.  They do not take any steps to record the basis on which the money is given. 

Pebbles is very much in love and when her conveyancer asks she and Bamm Bamm if they want to own the property in such a way that if one of them dies, the other automatically receives the property, they both readily agree.  Pebbles feels uncomfortable broaching the topic of the gift from her parents so doesn’t raise it with the conveyancer.

After 5 years, Pebbles and Bamm Bamm decide to separate.  Bamm Bamm says that if Pebbles can give him half of the money tied up in the house, he will sign it over to her.  Pebbles, Fred and Wilma assert the £50,000 gift to Pebbles should be deducted before calculating Bamm Bamm’s share.  Bamm Bamm disagrees and wants half of all of the equity in the property. 

In this situation, under the law as it presently stands, Bamm Bamm would be entitled to half of the equity in the house notwithstanding Fred and Wilma’s contribution of money and their intentions behind the gift.  Not very equitable.

What is the solution:

If Pebbles and Bamm Bamm had instructed the conveyancer at the time of purchase that they wanted to own the property in such a way that the money gifted by Fred and Wilma would benefit only Pebbles, the conveyancer could have drafted the purchase documents to reflect this.  

Pebbles and Bamm Bamm would then have owned the property as beneficial tenants in common in unequal shares and Bamm Bamm would have struggled to assert a claim against the gifted money.  In addition, they could have entered into a Declaration of Trust and/or a Cohabitation Agreement, to set out exactly what they intended to happen in the event of a future separation.

If Pebbles and Bamm Bamm had married, the situation would have become even more complicated as the divorce court is not bound to uphold their beneficial interests in the property, even if the purchase paperwork is all in order to protect this gift.  

On divorce, the court has a wide discretion to determine how a property should be dealt with and contributions such as large gifts from family members are only one of many of the factors the court will take into account. 

The solution when married:

If Pebbles and Bamm Bamm had entered into a Pre-Nuptial Agreement before their wedding to reflect their intentions that this gift from Fred and Wilma would not be benefit Bamm Bamm, then provided the Agreement was appropriately drafted and the correct formalities had been observed, he would have struggled to successfully assert a claim against that gifted money.

The lessons learned

If you are a parent looking to help your child get on the property ladder (or any other expensive life event), give careful consideration to all of the potential pitfalls of gifting or loaning that money to them.  

If you want to protect that money for your future benefit or for the benefit of your child alone, make sure you speak to a solicitor to ensure the appropriate documents are drawn up. If you have already gifted or loaned money, an agreement can be drafted retrospectively. 

If your child is looking to cohabit or marry, give careful thought to whether you can help protect family money for the future benefit of your family by encouraging them to enter into a Cohabitation Agreement or Pre-Nuptial Agreement.

We are a full-service firm and have different teams that can help you in lots of different circumstances.  

In the family team we can draft Cohabitation Agreements, Declarations of Trust and Pre-Nuptial Agreements.  Such documents are incredibly helpful and can be used to protect money received from the bank of mum and dad, among lots of other things.  If you think we might be able to help you, please call for a free 15 minute telephone consultation.

If you require any more information on this topic please contact Mel via mel.loxley@birkettlong.co.uk or call 01206 217384.