Legal protection for parents helping their children buy a home
It’s increasingly difficult for young people to get a foot on the property ladder these days. This has resulted in parents stepping in to help them out financially. But while parents are often more than happy to give their children a head start, they understandably worry about how their contribution can be safeguarded.
The most common concern parents have is what happens where their child is in a relationship (or later enters into a relationship) and that relationship breaks down. Will their hard-earned contribution find its way into the pocket of the ex?
The reality for parents is that once they make a financial contribution to their son or daughter they lose immediate control of that money and the risk of it passing outside the family is a very real one. It is only by ensuring that legal safeguards are in place that parents can protect their money. However, there is no ‘one-size-fits-all’ solution to this problem. Each case is different and a variety of different factors come into play.
Where there is jointly owned property, for instance, it is important to differentiate between property owned as joint tenants and property owned as tenants in common. The options available to protect the parents’ ‘investment’ will differ according to which form of joint ownership is used.
The legal status of the child’s relationship is also fundamental. The law governing how property is distributed following a relationship breakdown is complicated and one important distinction is whether the couple are married (or in a civil partnership), or whether they are simply cohabiting. There is a world of difference between these two positions in the way the law deals with property rights, and it can produce strikingly contrasting outcomes. Again this must be taken into consideration when looking at the available legal protection for parents helping their children buy a home.
The starting point for any parent making a financial contribution is whether they intend the money to be:
a) a gift;
b) a loan; or
c) a contribution that gives them an interest in the property.
If it is intended that the parents have an interest in the property they may wish to specify that they are registered as joint owners. This will usually be as tenants in common, with a specified share of the property reflecting their contribution. But if this approach is taken then do consider how it might impact on capital appreciation. If for any reason it is considered inappropriate for the parents to be joint owners of the legal title then another option is for a declaration of trust to be entered into. This can show that the legal owner(s) hold the property on trust for the parents in agreed shares.
Where the money is paid as a loan then the parents should ensure that a formal loan agreement is drawn up that sets out the terms on which the loan is made and how and when it should be repaid. The loan agreement can be registered as a charge against the property to secure it. If there is a dispute over whether the money was paid as a loan or a gift, and no loan agreement has been entered into, it may be difficult to persuade a court that it was not a gift. Where a mortgage is required, a deed of postponement may also need got be drawn up.
If the parents are content for their financial contribution to be treated as a gift then there is little that can be done to protect their position. The property can be sold without their agreement and the proceeds divided without any obligation to take their wishes or intentions into account.
Because this area of law is so complex and full of potential pitfalls specialist legal advice should always be taken. It is particularly important to seek this advice before any money is paid, so that steps can be taken to ensure that the safeguards are put in place at the outset. Trying to do so after the event may be difficult or even impossible. The members of our property team will be happy to provide you with an estimate of the fee for reviewing your situation, advising you on the best way of achieving your objectives and drafting the necessary documents.
For further guidance on putting in place legal protection for parents helping their children buy a home call us on 0333 888 0404 or send us an email to [email protected]