It is more difficult than ever for young people to get a foot on the housing ladder. With rising property prices, growing inflation and the cost-of-living crisis increasing outgoings, young people are relying on their parents more than ever for financial assistance.
To get a foot on the property ladder, many young adults are buying with friends, family or other third party assistance. The number of cohabiting couples is also on the rise, and many of these are buying property together, often with the help of parents.
If your (now adult) child has called upon the “Bank of Mum and Dad” to help get on to the property ladder, it is important to understand the legal and financial implications of the investment you are making and seek appropriate advice.
From a legal perspective, it is recommended that you ensure that any investment in property is properly protected and that your intentions about how your contribution should be treated are recorded in writing at the time of purchase.
Whilst you may be happy to gift money to your child to help them out, consideration should be given as to how this may be viewed if they are moving in with a partner, or getting married, and whether you would want to ensure that your funds were protected, either for you or for your child, in case things go wrong in the future.
The risk is that if your child moves in with a partner, marries, or enters into a civil partnership, their partner may have a claim over the funds you have provided to your child, if things go wrong and they separate. Any money that you have contributed towards the purchase of your child’s property is therefore at risk without it being properly protected.
Below are some of the options which can be used to help protect family funds:
It may be that you consider lending the money, rather than it being a gift outright.
A formal loan agreement would show both the lender’s and the borrower’s intention to repay the sum of money, potentially with interest. Without a loan agreement in place, it is unlikely that if things went wrong in the future, the money could be recovered. In financial proceedings on divorce, there is still risk the court may consider a loan to be a “soft” loan (which will never be called in), or it may not be viewed as a loan at all.
A declaration of trust is a legal document which sets out the shares that each party has in a property. If you have contributed a significant sum towards the purchase of a property, this document can express your contribution as a percentage share of the equity. When the property is sold, the proceeds will be divided in the percentages set out in the declaration of trust.
If your child moves in with their partner and they are not married, they should consider entering into a cohabitation agreement.
A cohabitation agreement sets out the financial arrangements in regard to expenses, costs and capital in the property, while the parties are cohabiting with each other, after they separate and when any property is sold.
This is particularly important if the property is owned by one party in their sole name, they are purchasing a property together and/or parents are also giving them a helping hand with the deposit.
If your child is getting married, or entering into a civil partnership, a prenuptial or postnuptial agreement could help to protect your contribution if they were to divorce in the future.
Nuptial agreements, although not legally binding are likely to be upheld by a court if meet certain criteria. Any interest that you have in your child’s house, whether it is their marital home or a second property, should be outlined in the nuptial agreement to ringfenced it from the marital pot to be divided on divorce.
For more information about how you can ensure that your investment is properly protected and for advice about a bespoke agreement for your family’s circumstances, please get in touch.
With thanks to Henny Knott, Trainee Solicitor, for her assistance with this article.