The bank of Mum and Dad can seem an attractive option to first time buyers looking for some extra funding to put towards their deposit. However, things are not as simple as they may first seem. No pin number to remember or bank card to be responsible for, but receiving money from the bank of Mum and Dad brings its own set of problems, some of which are considered below.
A loan or a gift?
It is extremely important to be clear from the outset as to whether the money should be treated as a loan or a gift.
If it is a loan, then an agreement should be reached regarding how the loan will be repaid. Is there to be interest on the balance loaned? Will repayments be made in weekly, monthly or yearly instalments? What happens in the event of a default? This agreement should be entered into before money is transferred, it should be in writing and signed by both parties. Formalising the agreement in this way clarifies the parties' intentions and avoids any ambiguity arising further down the line. On death, if the loan has not been repaid in full then the loan will become a debt due to the estate of the deceased.
If the money is a gift, then a deed of gift should be entered. This deed confirms that the funds which were given to the children are to be treated as a gift and that there is no repayment required. A formal deed of gift, or written confirmation that the funds transferred were a gift is often required by the conveyancing solicitor who is dealing with the purchase for their internal compliance requirements.
Regardless of whether it is a loan or a gift, it is advisable to have the official legal documents drawn up by your solicitor. The solicitor will then be able to keep a record of these alongside your will. This will assist your executors when dealing with your estate on death to confirm where the sums went during lifetime.
Inheritance tax consequences
If you decide that the money you have given to your child is to be treated as a gift, then this may have implications for your inheritance tax position. There is no limit on the amount which can be gifted by family or friends. However, this gift can become an issue if the individual making the gift dies within 7 years of making it. Depending on the value of the individual's estate who has made the gift, that gift may become liable to inheritance tax on death. The standard position, unless wording is inserted to state otherwise, is that the recipient of the gift is to pay any inheritance tax which falls due on the failed gift.
Mortgage provider vs your loan agreement
If there is still a mortgage being taken over the property, this can cause an additional complication. Mortgage providers may be more cautious providing finance when they know that there is already a loan in place. The lender in these circumstances will often insist on the mortgage being the first ranking security. This means in the event of default on payment, they would be paid first.
Protecting your child's position
There is also the additional complication if your child is purchasing their home with their partner with finance from you. Legal advice should be taken on what steps can be taken to protect your child's share of the property should the relationship break down.
If you have queries on the above, reach out to your usual Brodies contact.
Contributor
Solicitor
