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The Bank of Mum and Dad

Thursday, January 05, 2017

Like most loving and caring parents out there, you probably want to help your child purchase their very first property.

Many questions are probably going through your mind right at this moment; how exactly can ‘YOU’ the bank of mum and dad help? What are the issues that may arise? What options do we have?

Data from Legal & General (L&G) reveals that one quarter of all property transactions are funded by the ‘bank of mum and dad’. The contribution can be provided either as a gift or as a loan which may or may not be secured against the property. This provides many with an opportunity to secure their first home more easily as many individuals or couples struggle to save the essential amount required for the deposit on a property, with a minimum amount being required in order to secure additional lending from a mortgage lender.

The first issue the person providing the contribution needs to consider is whether they wish to enforce any terms. Are they looking to simply provide a gift with ‘no strings attached’ or do they want this contribution to be protected and repaid in the future? Getting a clear answer to this from the onset will determine how the contribution will be dealt with and will enable all parties concerned to be adequately protected.

The most common method of contribution will be in the form of a gift. There will be no requirement for this gift to be repaid at any stage in the future and no interest will be noted against the property. It is, therefore, imperative that the family member providing the gift is certain it is the right decision for them and seek specialist legal and financial advice. This will involve an assessment of their own future plans and confirmation that they are able to make a gift without this affecting their own short or long-term goals. In particular, it is important to consider whether there would be any Inheritance Tax implication resulting in any tax being payable by the persons making and receiving the gift now or in the future.

In order for the gift to be accepted in a conveyancing transaction, the gifting relative will have to confirm in writing the amount they are gifting and that they have no requirement for this to be repaid in the future or for any interest to be registered against the property. It will also be essential to provide documentary evidence to show the source of the funds that are giving, such as proceeds from a previous house sale or an accumulation of savings. Where a mortgage lender is involved in the purchase, they will require this confirmation in writing in order to provide consent to the gifted element of the deposit.

Providing all the above information as soon as possible will avoid the purchase being delayed. The buyers should always seek further clarity from a specialist if they need further help or guidance in understanding these requirements.

The benefits of obtaining funds from the ‘bank of mum and dad’ will see many people joining the property market and overcoming hurdles securing lending and saving the requisite amount for a deposit. However, it is imperative that the intention of all parties is carefully considered and the true nature of what a gift is clearly understood by all parties connected to the transaction.

Any terms and conditions should be agreed and recorded in order to avoid any issues arising in the future.

A Declaration of Trust or a Loan Agreement may be drawn up for the parties setting out the loaned amount from the relative and how this should be repaid including any interest on the initial amount. This will confirm expectations and bind the parties in the written contract to follow the terms.

“The bank of mum and dad” provides very exciting opportunities for families. Whether you are a buyer or the relative making a gift, you should never hesitate to speak to a specialist to ensure you are on the right track and you have a peace of mind for the future.

Just like a normal bank loan, the bank of mum and dad should be considering and all options weighed, before any major decisions to lend or gift are made.

For more information: www.rgsolicitors.co.uk

Image: 401(K) 2012