â€˜Bank of Mum & Dadâ€™ â€“ To gift, or, not to gift...
Posted on 30 January 2018 by Kylie Bourne
Most of us, at some point in our lives, have had to call upon the good will of our parents to ‘bail us out’….I know I certainly have at least once or twice in my younger years! Parents will often do this by gifting or loaning money to their children for things such as a little help towards buying your first car or, going on your first holiday with your friends etc. So how does gifting money to your child for these things differ from gifting money to buy a property? The answer is….MASSIVELY!!
When you purchase a property you will be asked to provide evidence of where the funds you are using for the purchase have come from. If any of those sums are funds that have come from, or are coming from, a third party, for example your parents, then your parents will also be asked to provide evidence of the origin of such funds together with clarification of a few other matters which we shall come to shortly.
I all too often see cases where dad has passed away and mum has been diagnosed with a debilitating disease which, restricts her from leading the active life that you and I enjoy every day of the year. Mum can’t manage the basic tasks in life such as getting dressed, washing the pots, making a sandwich and it’s all just becoming a bit too much for her to cope with so, the kids (now fully grown adults but, in mum’s eyes will always be her babies !) step into the breach.
The daughter with her partner of several years (unmarried) decides to buy a house with an annexe so that their family and mum can live together. Mum can move into the annexe so the daughter can care for her needs full time.
In order for the daughter and her partner to buy the house they need to either find another £80,000.00 or get a larger mortgage to help them achieve this. The daughter and her partner can’t afford to increase their mortgage repayments and they already have the maximum term offered on their mortgage.
Mum comes up with a bright idea….. she will sell her house to move into the annexe with daughter and partner. Mum will have the entirety of her sales proceeds and everything she has in her estate, which she plans to split between her children when she passes away. Mum asks to see her Solicitors for some advice as to how she may be able to help give her daughter the £80,000.00 needed to buy the house with the annexe.
You, as the recipient of the funds are known as ‘the Donee’. Your parents in this case will be known as ‘the Donor’.
The Donor, before gifting the funds, will usually consider the following: -
• Do I need to get hold of the funds at a later date?
• Do I require some form of repayment for the funds?
• Do I want to receive any form of interest on top of the funds provided?
From a legal perspective, we also require the Donee to consider the following: -
• What are the implications from a tax perspective?
• If they were to give funds to their child, will this be viewed as deprivation of their assets?
• Do we, as your legal advisers need to protect the funds so that you can get access to it in the future, if necessary?
• If you intend the funds to be for one party of the purchase transaction, such as their own child but, not for the other purchaser, being their child’s partner, how can we protect them from the partner getting hold of the funds in the future?
• Will the lender approve such sums being gifted/loaned?
• Do we need to provide some kind of indemnity coverage in the event of bankruptcy?
There are various ways in which we can achieve the desired outcome and in order to respect mums wishes whilst she is still alive and once she has passed. The following methods would be the most common options available to mum: -
• Legal Charge
• Declaration of Trust with a lifetime occupational clause
• Declaration of Trust between the legal interested parties
• Declaration of gifted sums
In order for the transaction to progress, whatever decision mum makes to either protect her cash injection or not, a formal Declaration will need to be signed by all parties involved and possibly, depending which option mum decides to take, it must also be recorded at H M Land Registry.
If you require any further advice regarding gifts of money for house purchases then please contact Kylie Bourne at Pardoes to discuss.
Posted in: Buying & Selling Your Home