Help from the Bank of Mum and Dad when Buying – What are the legal implications?

First time home buyers often have to resort to the Bank of Mum and Dad for help in order for them to get on the property ladder.

However, this phenomena is not just restricted to first time home buyers. In the past year, I have acted for many people looking to move up the property ladder (otherwise known as “second-steppers”) with the help of family members.

If you are buying a property with help from family, then you should be aware of the potential legal issues that may arise.

I have listed below some of the common issues which you need to be aware of:

A charitable gift or a helpful loan?

It is important to specify from the outset whether the help you are receiving from your parents is by way of gift or loan. If it is a loan, then you should be aware that this needs to be disclosed to your lender (if you are taking out a mortgage).

It is always advisable for parents lending money to their children to seek independent legal advice. They may wish to safeguard the repayment of the loan or against any change in circumstances (for example, if they need the money in case of a health emergency). They may wish to have a restriction or a charge placed against the title of the property.

Parents who are lending money to their children will also be concerned about protecting their assets from bankruptcy or divorce. It needs to be documented that this is a debt (as opposed to a gift) which needs to be repaid.

What about the Lender?

You must also be aware of the mortgage lender’s requirements when family members assist you in buying a property.

If the help is in form of a gift, your mortgage lender will require the person making the gift to confirm in writing that the gift is unconditional and non-refundable and that they have no interest in the property. Some lenders require that the gift comes from a UK resident and a UK bank account.

My solicitor keeps talking about Money Laundering…

Solicitors are required by law to check the source of funds for any property purchase. So it is not enough to tell your solicitor that your parents are gifting you a substantial amount to help buy the property. If money has come from your parents’ savings or a sale of another property, then your parents will have to provide bank statements or a completion statement.

How to protect the Bank of Mum and Dad from a relationship breakdown or divorce?

In cases where parents contribute towards the purchase of a property, for a start, you and your partner/spouse should hold the property as tenants in common and not as joint tenants.

You should consider entering into a Declaration of Trust detailing each party’s contribution and the percentages in which they own the property (taking into account your parent’s contribution).

Without a declaration of trust, the assumption is that you own the property in equal shares.

If you are planning on marrying your partner, you can enter into a pre-nuptial agreement which will protect the amount gifted by your parents against divorce proceedings. Even if you are already married, you can enter into a post-nuptial agreement.

Finally, you and your partner/spouse should have Wills in place to ensure that the amount gifted reverts back to your parents (or your part of the family) in the case of death.

Delfin is a Founding Partner and the Managing Partner at Posada & Co. He advises on capital and inheritance tax planning, trusts, estates and long term care planning. He also advises on drafting tax efficient wills and carries out probate work on simple and complicated estates. Delfin is passionate about helping people put their personal and tax affairs in order and helping people through very difficult times such as bereavement or the loss of capacity.