Protecting the bank of mum and dad?
Every month we hold free legal clinics in Kingsbridge and Dartmouth and Salcombe.
Recently we met a couple who wanted to lend their daughter money to help her to purchase her first property with her partner. They are not alone, it is estimated £6.3 billion will be provided by the “Bank of Mum and Dad” this year.
Their question was one which we are often asked, should the “helping hand” be a gift or loan or do they take a share in the property to be purchased?
A loan
Giving a loan can provide protection for the funds. Your child may use the money to buy a property in which they live with a partner, and if there is a breakdown in that relationship, the value of the funds you provided can be protected from a claim by the partner.
If the loan is still outstanding at the date of the parent’s death, it will be an asset in their estate. This may have inheritance tax implications. If you choose to give a loan initially, but at a later date ‘forgive’ that loan it would, at that date, convert to a gift.
A gift
If the money is given outright it may impact inheritance tax liability. Gifts made more than seven years before death are generally not included in the Inheritance Tax calculation. However, if you die within seven years of making the gift it is counted back into your estate for inheritance tax purposes.
A disadvantage is that the value of the gift may be at risk if your child’s relationship with their partner breaks down or they get themselves into financial difficulties. Making sure there is a Cohabitation Agreement in place could reduce the risk with partners, but not creditors. Setting up a trust could allow a parent to make a gift but still retain control and protect the value of the gift.
A share in the property
The money could be used to “buy” a share in the property. Like a loan this will protect the money from a claim by a partner and will also protect it against creditors, provided that the parents are named on the legal title. The risk is that the share of the property will be an asset in the parents’ estate when they die and may have inheritance tax implications.
The importance of documentation
Whatever the arrangement, clear documentation that records the date and amount of payment is essential to help avoid disputes between you and your child, will ensure clarity for administration of the parent’s estate on death and will minimise the risk of misunderstandings between siblings or HM Revenue and Customs.
A Loan Agreement should state whether the loan includes interest (or not) at a fixed or variable rate, it should set out repayment terms such as the rate and frequency of payments. For a gift, a Memorandum of Gift should include details of who is receiving the gift, its value and the date it was made. If the payment is in return for a share in the property a Declaration of Trust is essential to record who owns what share.
If a loan is forgiven, make sure that you have recorded that fact to avoid your child being forced to repay the loan after you have died.
To find out more contact Rebecca Weare or Rebecca Bristow at Start Point law on 01548 288008, email info@startpointlaw.co.uk or come along to one of our legal clinics. We will be at Kingsbridge Library on 15 October, Salcombe library on 16 October, and Dartmouth Library on 1 November.