Articles

Published by: Ben Twitchen

The Bank of Mum and Dad phenomenon continues!

With rising property prices it is unsurprising that many children are looking for financial assistance from their parents when purchasing property.  The Bank of Mum and Dad is consequently very much thriving. 
What should parents and their child consider before making such a decision?

• Both parties should seek independent legal advice;
• Both parties should consider what the legal implications would be if the child suffered a relationship breakdown; and 
• Both parties should consider on what basis the help is being provided i.e. is it a gift or a loan or do the parents wish to have an ownership interest in the property?

Married/Engaged Couples -How can the investment be protected?
If a parent provides an investment to a child who is married or engaged the child should consider whether to enter into a pre-nuptial agreement and/or a post-nuptial agreement.  
A pre-nuptial agreement is a bespoke legal document entered into by a couple planning to marry or enter into a civil partnership, which sets out what they intend to happen to their money and property if the marriage or civil partnership were to end by way of divorce or dissolution.  

Is a pre-nuptial agreement binding on the Court?
Pre-nuptial agreements are not strictly legally binding on the Court. However the Court will follow the terms of a pre-nuptial agreement unless the effect would be unfair, and providing certain steps were followed when the agreement was prepared. 

These include:

• Did both parties disclose their financial position?
• Did both parties receive independent legal advice?
• Did the agreement deal with what would happen if the parties have children and, if not, what effect this would have on the agreement? 
• Does the agreement satisfy the financial needs of both parties?

Are pre-nuptial agreements only for the wealthy?
This is a common misconception.  Pre-nuptial agreements are not only for millionaires, but are also for couples who wish to protect significant assets such as property or investments, for anyone that owns a business, for anyone who is expecting an inheritance, or for anybody looking to ring-fence certain assets as non-matrimonial assets.  This can include property or assets owned by either party prior to the marriage.

How could a post-nuptial agreement help protect assets?
Post-nuptial agreements appliy to people who are already married or in a civil partnership and are often put in place after a significant change in the parties’ financial circumstances. A post-nuptial agreement can reinforce an agreement entered into prior to the marriage.

Are post-nuptial agreements binding on the Court?
As with pre-nuptial agreements, post-nuptial agreements are not strictly binding on the Court in the event of a later divorce. They are also likely to be followed by the Court, provided that they are not viewed as unfair in the circumstances.  Again, more weight is likely to be given to an agreement where both parties have disclosed their financial positions and taken independent legal advice on the agreement and its effects.  An important point to note is that with both pre-nuptial agreements and post-nuptial agreements, it is crucial to update the agreement when circumstances change, for example, if the parties go on to have children.

What would happen on divorce if there is neither a pre-nuptial agreement nor a post-nuptial agreement?
In circumstances where the parties are married or have entered into a civil partnership and parents have assisted in purchasing property by way of a gift or loan, without the protection of a pre-nuptial agreement or post-nuptial agreement, it is possible that the investment will form part of the marital pot to be divided between the parties.  This can be particularly upsetting for parents who feel that their hard-earned cash has been lost. 

What if the financial assistance was intended as a loan or for the parents to own part of the property?
In those circumstances it is extremely important to record any loan by way of a loan agreement or a Declaration of Trust and to refer to these documents in any pre-nuptial or post-nuptial agreement.  A Declaration of Trust can set out in what proportions the parties own the property and detail any money which was used to purchase the property and when that should be repaid.  
What if a child is neither married nor intending to marry?
If the child is living with their partner and not intending to marry, then it is equally important to ensure any gift or loan is protected. This can be achieved in one of the following ways:

A Loan agreement 

            A loan agreement can record the amount of money the parents lend to their child and detail when the money is due to be paid back.

A Declaration of Trust

As detailed above a Declaration of Trust can set out in what proportions the parties own the property. It can also set out any money which was used to purchase the property and how the proceeds of sale should be divided on a sale of the property.

Cohabitation agreement

            A cohabitation agreement can be used to set out two parties’ intentions regarding any property that they own as well as other matters such as cars, savings, personal possessions and day to day expenses.  

If you are a parent considering making a loan or gift to a child, or a child considering accepting a contribution, and if you are in a relationship, then we will be able to advise on the best way to protect that contribution.  Parties should also seek separate tax advice about the implications of any potential gift, loan or other arrangement before proceeding.