When the Bank of Mum and Dad gets it wrong

Legal & General published a report in 2019 indicating that the "Bank of Mum and Dad" had lent around £6.3 billion to fund house purchases for their children.  If the Bank of Mum and Dad was a real bank, it would be the 11th most popular mortgage lender within the UK. It has no High Street Branches and does not advertise!

What is surprising, bearing in mind the amounts of money involved, is often how casually this arrangement is dealt with between parents and children.  There are real potential pitfalls that need to be addressed at the time the loan is made, rather than some years down the line when there is a dispute or difficulty.

The average contribution from family members towards children buying a property in the south-east is over £25,000.  However, very few parents take legal advice as to any conditions, or written agreement that should be in place between themselves and their children.  If the child, as buyer of the property takes out a mortgage with a Lender then the parents have to sign a letter for the lender confirming that the money is an outright gift and not a repayable loan. However consideration should still be given to the agreement between the parties, particularly where the parents are gifting monies not only to their child, but also, in effect, their child’s partner who is the joint owner of the property.

The issue has again arisen as a result of a recent case.  The Court of Appeal decided the case of Farrell v Burden.  Mrs Farrell believed that she had loaned her son, Mr Farrell a sum of money in 2005 so he could buy a property.  However, Mr Farrell's wife, Ms Burden disagreed.  She believes that the money that her mother-in-law had given to the pair had been gifted rather than loaned.  Neither side had any documentation to support their view.  Unfortunately, Mr Farrell died in 2016 and his Will stated that his estate would pass primarily to his wife.  He also asked that part of his estate went to his children from a previous relationship.  There was nothing in his Will about repaying the debt to his mother.  She brought a claim against his estate for repayment of the sum that she believed she loaned to him and his wife in 2005.  The Court of Appeal, in December 2019, upheld the original decision of the County Court by stating that Mrs Farrell did not have any proof that she was owed money by Mr Farrell's estate.  It was held that the payment made by Mrs Farrell had in the eyes of the law been a gift.  There was no evidence that the money was intended to be a loan.  There were no documents showing when the loan would be repaid, and whether interest was applicable.  Mrs Farrell did not ask her son and his wife to sign anything before handing over the money and she had nothing in writing to support her claim.

Family lawyers and Probate lawyers are seeing more and more cases come up in disputes in either family cases, or contested Probates.  These disputes appear to occur because the "Bank of Mum and Dad" has loaned or gifted money to a child to buy a property but things have been done in haste, without the appropriate documentation.  The Bank of Mum and Dad, and their children did not have proper discussions about how the money is to be used and whether it is to be repaid.  Few give thought to having a Declaration of Trust between the child and their partner indicating that it is the child that will have, as a result of the gift from the parents, a greater proportion of the equity in the property.

Things often become tricky once relationships break down.  In a matrimonial situation, the Bank of Mum and Dad, with the assistance of their child, will try to establish, retrospectively, that monies need to be repaid to protect what are considered as family assets.  This is arguing that in effect the monies handed over were a loan, or a gift with conditions.  However, without documentation, joint owners, who are now ex-partners can benefit from what is seen as a gift when that was not necessarily the entire intention.

Barbara Stewart, a partner in Martin Tolhurst said "We are seeing more parents stepping in where they can afford to support their children in buying a property. This can be money that the parents have saved, or monies that they raise by re-mortgaging their own property.  However, sometimes this gives rise to real problems down the road with challenges to estates, or concerns over divorce/separation settlements where terms have never been properly discussed at the time the gift or loan was made, and never set out in writing.  Often parties consider that the legal costs of preparing documents such as Declaration of Trust are unnecessary but they are small in comparison to the potential costs of litigation and the heartache that comes with that potentially some years later. The cost of a Declaration of Trust is usually around £300-£400 +vat and gives real piece of mind and certainty to all parties involved ”.

If you feel you would benefit speaking to a expert in any areas touched on that may help you make the right decisions in the long run when supporting children purchase their first home or buying your first property, get in touch today on 01795416933 or email newbusiness@martintolhurst.co.uk.