With the election looming, BBC2’s Newsnight recently dedicated a programme to what issues matter to younger and older voters in the upcoming general election. It reminded me of a common scenario where parents assist an adult child to buy their first home. Often referred to by family lawyers as the ‘Bank of Mum and Dad’, the deal struck between parent and child surfaces when a relationship goes wrong.
As a nation who like to own property, even in times of austerity, significant financial assistance can be provided by one generation to another. Because the money is provided within a family context, all too often there is a lack of formality surrounding the arrangement. Was it a gift, an investment or a loan? What happens to it if the adult son or daughter splits from his or her partner? To whom does the money belong?
In divorce or civil partnership proceedings the Family Court will determine what is classed as a matrimonial asset. The court has wide powers in dealing with the division of assets generally. Where there is a financial contribution by parents towards the purchase of a matrimonial home bought in the joint names of the separating couple, the outcome for the parents and adult child may feel harsh where the deal struck, often many years before, is not properly recorded.
Both adult child and parents who invest in an adult child’s property need to understand the potential consequences of the financial arrangement. Options available to try to protect the fund include:
- a Pre-Nuptial Agreement or Living Together Agreement made by the adult child and the new partner setting out the parties’ intention in relation to any third party funding.
- Both parent and adult child are registered as legal owners[i] on the property and/or
- The parent and child make a Declaration of Trust[ii] confirming the parent’s contribution and the amount of their beneficial interest in the property.
What should not happen is a loose arrangement between parent and adult child, discussed between themselves only, excluding the adult child’s spouse or partner. The true financial arrangement could be investigated in the event of relationship breakdown – the spouse potentially claiming the parent’s financial input was always intended for both parties – after all, it’s the matrimonial home, isn’t it? The parent may announce that it was intended to be a loan now realising that the other spouse may benefit from it. This can backfire on the parent if the monies were intended to be a gift as part of tax planning.
Huge expense and upset can be avoided if the financial arrangement is clearly documented before funds are released. Where no documentation exists or there is an attempt to create a more formal arrangement only when the adult child’s relationship gets rocky, all parties face the risk of an unpredictable and expensive outcome if court proceedings are the only way the matter can be determined. The Family Court will consider all available evidence to determine whether a parent’s contribution remains theirs or if it has become part of the matrimonial pot for division between the couple.
It can be worse if the couple have never married because the flexibility and discretion available within a matrimonial context does not exist; any dispute may have to be determined by strict property law principles instead.
It is crucial therefore whether the parties marry or live together for parents to take steps to establish their intentions at the outset.
[i] It is very important you consider all associated effects of this which require supplemental legal and accountancy advice
[ii] As above
This is not legal advice; it is intended to provide information of general interest about current legal issues.