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Estate claim provides warning for Bank of Mum and Dad
Parents who help their children get on the property ladder are being urged to adopt a more professional approach when it comes to handing over the cash.
Faced with high rental costs and soaring property prices, more parents are dipping into savings or releasing capital from their own property to support their offspring. Research by Legal & General estimates that £6.3bn was provided last year by the ‘Bank of Mum and Dad’ (BoMaD), effectively making BoMaD the 11th largest mortgage lender in the UK, according to UK Finance.
59% of those receiving the funds were given them as a gift with no requirement to pay it back, whilst 14% received a mix of gift and loan. Only 6% were charged interest and 8% of parents lending wanted an equity stake in return for their contribution. The average contribution in each case stands at £24,100 – rising to £31,000 in London.
Although parents may be happy to support their children, issues can arise if it’s not made clear whether a gift or a loan is involved, and the undertaking isn’t covered by a written agreement.
In Farrell v Burden, recently heard by the High Court, a mother tried to secure the return of the contribution she had made to her son’s property purchase, after he died leaving everything to his wife. Mrs Farrell loaned her son £170,000 in 2005. He repaid £90,000 later that same year but made no further capital or interest payments. When he died 11 years later, leaving nothing to his mother, she took action to recover the outstanding amount she said was due from his estate.
Mrs Farrell’s daughter-in-law, Ms Burden, claimed that the money had been given to the couple and, in the absence of any documentation, the Court regarded the payment as a gift. Mrs Farrell failed in her claim to recoup the money and was ordered to pay the costs of the estate in the action, reportedly around £100,000. On appeal, the High Court upheld the judgement on the grounds of lack of evidence, as Mrs Farrell had not asked her son or his wife to sign anything that would support her claim.
Whilst the cost of preparing such agreements may seem unnecessary at the time, the potential costs of litigation further down the line can be considerably outweigh the original loan and the cost of preparing such agreements. Having a written record of what is intended can help avoid such disputes arising.
An agreement can set out the terms of a loan to ensure money is repaid or establish that it has been made as a gift. For inheritance tax planning purposes, documentation to show when the money was paid and to confirm that it was made with the intention of being a gift may be crucial.
The sums involved and the complexity of property purchases make it essential to get the right advice. No mortgage lender would provide finance without protecting its interests and parents should consider taking the same approach.
This problem can also occur where parents have gifted or loaned monies to children, which is then paid into a jointly owned property with their cohabiting partner or spouse, and subsequently the relationship ends. The general rule should therefore be that before handing over any cash to their child, the parents should seek legal advice as to all the possible consequences.