Tracey Cook, Associate

A recent report by Savills estate agency has suggested that 52% of first-time buyers have received financial help from the so called ‘bank of mum and dad’ when buying their home. 

But what are the potential pitfalls of providing this financial assistance?
Whilst financial help from family members undoubtedly enables more people to get on the property ladder, if parties do not seek expert legal and financial advice, this can result in significant future financial losses.  When making a financial contribution to the purchase of a property, you may be encouraged to do this as a ‘gifted deposit’. A gifted deposit means that the lump sum paid is accepted as a ‘gift’ and therefore those making that gift will have no legal or financial interest in the property being purchased.  Historically, lenders have preferred a gifted deposit as opposed to a loaned deposit, which can be viewed as a further financial commitment, which may impact upon the borrower’s mortgage affordability. 

The biggest risk is where the gift is made to a family member and their spouse. If that family member were to later divorce, in the absence of any legal document recording that gift, the other party can rely upon the contribution as being a ‘gift’ to both parties. Current matrimonial law in England and Wales, considers the matrimonial home to be a jointly owned asset. In the absence of any form of nuptial agreement or loan agreement, recording the lump sum made, the parents who made the ‘gift’ are left with no financial claim.  The same may apply if the parties were not married and in the event of a future separation, the non-family member, seeks to make a financial claim against the property. In the absence of any legal document recording the gift made, the family member will be unable to protect their contribution, irrespective of whether it was intended only to benefit one of the parties in the event of any future separation.

So how can the gift be protected?
If the parties are not married at the time of making the gift but are intending to marry, they may wish to consider entering into a pre-nuptial agreement, recording any financial contributions made by their respective family members.  Alternatively, if they have no intention to marry, or are in a Civil Partnership, a Cohabitation Agreement or Civil Partnership Agreement, can also be prepared by a qualified family solicitor, clearly setting out any contributions made to the property purchase.  If the receiving parties are already married, it is still possible to record the gift by way of entering into a post-nuptial agreement, setting out clearly the contributions made and how these should be divided in the event of any future divorce.

If you are considering making a financial gift to a family member in order for them to purchase  a property, it is imperative that you seek independent legal and financial advice as to the possible implications of that gift. This should include advice from a conveyancing specialist; a private client lawyer to consider possible inheritance tax implications and a family lawyer, as to what type of nuptial agreement would be advisable.

If you would like further information, please do contact us at family@chubb-bulleid.co.uk or call 01749 836100.