The Bank of Mum and Dad

David Percival

Written by David Percival, Chartered Legal Executive at Spire Solicitors LLP.

As a result of high rental costs and soaring property prices, more parents are dipping into savings or releasing capital from their own property to support the next generation. Research by Legal & General estimates that a massive £6.3bn was provided last year by the Bank of Mum and Dad – or BoMaD – as it’s known.

If you are thinking of lending money to your child to assist with a property purchase, it important for you to consider any long-term legal consequences– both for the sake of your child and yourself. Initially, you should decide:

Is the money a gift or a loan?

Provided the money is meant as a gift and you do not wish to take an interest in the property or require repayment of the monies given, this is called a gifted deposit. This can be given by you or another family member forming all or part of a deposit for somebody wanting to buy a property. It can also be used in conjunction with the child’s own savings or help to buy scheme.

If the money will be a loan and you are intending to get it back at some stage, it is vital that the transfer of money is recorded in a formal loan agreement. Formal loan agreements, as opposed to outright gifts, offer the most protection.

What are the tax implications?

You will not have to pay any immediate tax on the gift when buying the property. However, for inheritance tax planning purposes, documentation to support when the money was paid and confirming that it was made with the intention of being a gift may be crucial, if it is to take advantage of the rules concerning such gifts when inheritance tax is calculated on the death of the giver.

How can you protect your contribution?

If your child is buying the property with a partner or friend, you can protect the money you have gifted with a declaration of trust, or deed of trust. This states who the money was gifted to – so you can specify you gave it solely to your child. In the event of the property being sold, this document will ensure your child retains ownership of your financial gift. It can also clarify if the money is a gift or a loan, and if the latter when it needs to be paid back.

In all cases, it is essential to clearly set out any arrangements in writing to avoid any challenges in the future. The property will be at the mercy of trusts and property law which is riddled with confusion, uncertainty and complexities and the outcome may not be what you intend in the event of a dispute.

If you would like to discuss any points in this article further, please contact Spire Solicitors LLP on 01603 677077 for all your legal needs.