A report by Legal & General (ref 1) highlights the growing trend of the “bank of mum and dad” assisting in their children’s property purchases. With banks tightening up their lending criteria, house prices on the rise and larger deposits being required, people are increasing looking to third parties such as parents to assist in their property purchases. Protecting the interests of the investors is important and a declaration of trust for the property is often the mechanism used.
The report suggest that half of first time buyers anticipate receiving financial help from their parents. Most commonly this is by contributing to the mortgage deposit. Additionally, a quarter of all home owners state that they have had to get help from family to purchase their property.
This coincides with the trend that more people are purchasing properties together, perhaps with a partner or a friend. Often the amounts each party are contributing towards the property will not be equal, or again, one party may be getting a gift of money from a family member to help with the purchase.
The result of the above is that we are seeing an increasing number of clients wanting to protect the money they invest into a property in case the worst should happen such as a relationship breakdown. Common scenarios include:
- Couple purchasing a house together. One party is contributing more towards the deposit or one party anticipates they will be paying more towards the monthly mortgage payments.
- Couple purchasing a house together and one or both parties are getting gifts or loans from their parents (or another third party) towards the deposit or towards renovation costs at the property.
One individual owns a property, yet they are starting to cohabit with a new partner. The new partner will not be formally going onto the title deeds or the mortgage as a legal owner, but the parties want to recognise the fact that the new partner will be contributing towards the monthly mortgage payments.
In the above scenarios we would often recommend a declaration of trust is prepared in relation to the property concerned. A declaration of trust is a document signed by the parties to acknowledge who are the legal owners of the property but more importantly, who are the beneficial owners of the equity in the property and how is that equity divided. The legal owners and the beneficial owners will often be different. For example, whilst both parties’ names may be joint legal owners, the true division of the equity could be 75% to 25% representing their initial contributions towards the deposit. If parents are lending money into the property purchase, do the parents wish to own percentage share of the equity in the property?
Alongside a declaration of trust, we may also recommend a cohabitation agreement to record other details about how the property is to be managed if a relationship between two parties were to break down. For example, who is to move out, who pays which bills, how is the property to be sold.
Finally, a loan agreement may sometimes be recommended if parents are truly lending (rather than gifting) money to one or both parties. Depending on the mortgage company’s requirements, the parents may also want to take a charge against the property to further secure their interest. Where necessary, we are able to draw on the expertise of our colleagues in the Property and Banking teams to ensure that we provide a detailed expert solution, whatever the circumstances are.
We also recommend that parents who are making such gifts to their children to help them on the property ladder take advice (both legal and financial) in relation to the inheritance tax consequences of such gifts. Equally, the parents may wish to review their Wills if they have more than one child yet are only providing financial assistance to one during their lifetime in this way.
Clarion’s Private Client team have a wealth of experience in dealing with the above issues. If you have any questions in relation to the declaration of trusts, cohabitation agreements or loan agreements, or would like to discuss any points further, please contact a member of Clarion’s Private Client team who would be happy to help.
Ref1: Legal & General Article :(https://www.legalandgeneral.com/insurance/home/bank-of-mum-and-dad/Bank-of-Mum-and-Dad-Full-Report-2017.pdf)
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