Over the last 20 years, the cost of education, transport, entertainment and most significantly housing has risen sharply. Property prices and rents have outpaced wage growth, leading to what is often described as “Generation Rent”, with many young people finding it increasingly difficult to save. As a result, more buyers are turning to family for help, and the so called “Bank of Mum and Dad” is now one of the most significant sources of support for first time buyers in the UK.
Helping a child onto the property ladder can be hugely rewarding, but the legal and practical issues can be more complex than they first appear. It is important for parents to think carefully about how their contribution is structured and how their interests can be protected if circumstances change.
“Straightforward”
Property transactions are often described as “straightforward”, but in practice there are usually details that need careful thought. These details can turn what seems like a simple family arrangement into a source of tension or dispute later on if they are not addressed at the outset.
With younger generations struggling to keep pace with rising prices, it is increasingly common for parents or other relatives to assist with deposits or purchase costs. This raises an important question: is the money a gift, a loan, or something else and how is the benefactor’s interest protected if that is what they intend? From experience, uncertainty in this area is one of the most common causes of difficulty later on.
Ways Parents Commonly Help
A gift
Gifting money is one of the most common ways parents support a property purchase, and it is often the simplest option from a conveyancing perspective. However, because of the amounts involved and the scrutiny that can arise from lenders or the courts, it is sensible for any gift to be clearly documented and records retained.
A frequent concern is who ultimately benefits from the gift, particularly if a child later separates from a partner. While outcomes will depend on individual circumstances and any court decisions at the time, certain documents can help clarify intentions and provide a degree of protection, such as:
- A Living Together (Cohabitation) Agreement
- A Pre-nuptial or Post Nuptial Agreement
- A valid and up to date Will
These arrangements can help record that a contribution was intended for the child and set out how it should be treated if the relationship ends or on death. Independent legal advice from a family law or private client solicitor is strongly recommended before entering into any such agreement.
A loan
If assistance is intended as a loan rather than a gift, it is important that expectations are clear from the outset. Informal family loans can easily give rise to misunderstandings if nothing is recorded in writing.
A formal Loan Agreement can help by setting out, for example:
- That the funds are not a gift
- Repayment terms and timing
- Whether interest is payable
- What happens in the event of default?
- How the loan is treated if the property is sold or a relationship ends
Clear documentation can reduce the risk of disputes later on and can also assist lenders and family lawyers in understanding how the funds were intended to operate. Parents and children should each take independent legal advice before signing any loan documentation.
Protecting a Contribution in the Property
Declaration of Trust
Where a contribution is made towards a joint purchase, particularly where contributions are unequal, a Declaration of Trust is often used. This document records key points such as:
- Who has contributed what
- How ownership shares are held
- Responsibility for outgoings
- How sale proceeds are divided if the property is sold
Used correctly, a Declaration of Trust can provide clarity and a measure of protection if a relationship breaks down or the property needs to be sold. Independent legal advice should be obtained before entering into such an arrangement.
Securing the loan with a charge
In some cases, a family loan may be secured against the property by way of a legal charge or similar arrangement. This can allow the loan to be repaid on sale of the property and may give the lender stronger rights if repayments are not made.
However, if there is already a mortgage, consent from the main lender is usually required, and it may not always be possible to register a further charge. Priority between lenders and the practical implications of enforcement require careful consideration, so specialist legal advice is essential.
Joint Ownership as an Alternative
Another option some parents consider is buying a property jointly with their child. This can sometimes assist with affordability or help a purchase proceed. However, it can also have wider legal consequences which should be carefully considered before any decision is made.
Partners, Friends and Tenants
Tenancy agreements
If the property will be shared with a tenant, friend or partner, a written Tenancy Agreement or licence can make clear the rights, responsibilities and financial arrangements between occupants. When used alongside a Living Together Agreement or Declaration of Trust, this can help manage expectations and reduce the risk of disagreements over occupation or outgoings.
Planning for Change
Relationships and circumstances change over time. Any agreements or arrangements made at the point of purchase may need to be revisited if there is:
- Marriage or civil partnership
- Separation or divorce
- Children
- Remarriage or the formation of a new long term relationship
In some situations, existing arrangements may need to be updated or replaced for example, with pre- nuptial or post nuptial agreements so that they continue to reflect the parties’ intentions and current legal advice.
What About Wills?
Assistance with a property purchase often has implications for wider estate planning. Parents may wish to consider:
- Whether the contribution is to be treated as an early inheritance
- Fairness between children or other beneficiaries
- Whether any loans should be recorded as debts owed to the estate
Both parents and children should review and, where necessary, update their Wills when significant financial support is given. Advice from a private client solicitor can help ensure that lifetime assistance and testamentary wishes are aligned.
How Lewis Nedas Can Help
At Lewis Nedas Law, we also have a dedicated Wills and Private Client department who would be pleased to assist with reviewing or updating Wills alongside any property related advice.
Helping a child onto the property ladder can be life changing for the whole family. With careful planning, clear documentation and appropriate legal advice, it is possible to provide that support in a way that offers greater clarity and protection for everyone involved.
Caroline Davindrarajan is an experienced Residential Property Professional who works with Jeremy Galman, Director, as a member of his specialist team.
Contact us to see how we can assist using our online enquiry form or call 020 7387 2032.