Banking on mum and dad

As rental costs and property prices increase, more parents are dipping into savings or releasing capital from their own property to support the next generation. Research carried out by Legal & General estimates that parents provided £6.3bn within the last year towards property purchases. Based on this figure alone and according to rankings compiled by UK Finance, the collective voice for the banking and finance industry, the so-called Bank of Mum & Dad is effectively the 11th largest mortgage lender in the UK.

Not all of this money is actually lent: more than half was given as a gift with no requirement to pay it back. In the circumstances where a loan was agreed only a small percentage of parents wanted an interest in the property in return for their contribution.

Despite the amount of money involved and the complexity of property purchases, not all families are agreeing at the outset whether the money is a loan or a gift and fewer still are putting this in writing.  No bank or building society would just give a house buyer money without having their interests properly protected and it’s time that the Bank of Mum and Dad took the same approach if they require repayment.

With the average parental contribution now standing at £24,100 (£31,000 in London), it can prove a potential minefield for parents and children alike if it’s not clear at the outset whether the money given is a gift or a loan, and the arrangement is recorded in writing. While parents may be happy to support their own children, if the contribution ends up with someone outside the family, it’s likely to cause additional problems when there are considerable sums involved.

That situation was the focus of the High Court recently, when a mother tried to secure the return of the contribution she had made to her son’s property purchase, after he died leaving everything to his wife.  In Farrell v Burden, Mrs Farrell loaned her son £170,000 in 2005, and he repaid £90,000 later that same year, but with no further capital sums or interest paid after that.  When he died 11 years later, leaving nothing to his mother, she took action to recover the outstanding amount she said was due from his estate. His widow, Ms Burden, claimed that the money had been given to the couple, and not loaned. In the absence of any documentation, the court said the payment was a gift in the eyes of the law.  Mrs Farrell was ordered to pay the costs of the estate in the action, reportedly around £100,000, as well as losing her claim for the money.  While she appealed the case, the High Court upheld the judgement on the grounds of lack of evidence, as she had not asked her son or his wife to sign anything that would support her claim.

Recording everything in writing is not just important for setting out a loan to ensure money is repaid. It is equally important to show where it has been made as a gift for inheritance tax planning purposes.  Documents which  confirm when the money was paid and that it was made with the intention of being a gift may be crucial, if it is to take advantage of the rules concerning such gifts when inheritance tax is calculated on the death of the giver. In addition, most mortgage lenders will need to be clear about where the balance of the purchase money is coming from, and whether or not it will need to be repaid.