As it becomes increasingly difficult for people to get that first foot on the property ladder it is becoming more and more common for people to call upon the bank of mum and dad or even Aunties, Uncles, Grandparents or siblings. What ever the relationship informal gifts and loans are becoming increasingly common.
Whilst there is of course nothing wrong with wanting to help your family and it is great if you are in a position to do so, there are a number of things which you should consider before doing this.
Loan or Gift?
You will need to agree between yourselves whether this is genuinely an unconditional gift or whether it is in fact a loan. Do not be pushed by third parties (e.g. lenders) to agree to calling this is a gift when it is in fact in reality an informal loan which you would like repaid at some point in the near or even distant future.
Often your family member will also be obtaining a mortgage from an institutional/ high street lender who will have their own conditions about the terms of and source of the balance of funds. You may therefore find yourself tempted to agree to it being disclosed to the lender as a gift rather than it being an informal loan. By an informal loan we mean one where you do not necessarily require regular payments and have no wish to enforce repayment but you would quite like it repaid when said party is in a position to do so.
If you find yourself in this position then please do speak to a Solicitor for advice and guidance.
Whilst you are no doubt confident of your family member’s financial position, unfortunately in this challenging economy even the most responsible and hard working amongst us can find themselves in financial difficulties. If your family member was to be made bankrupt would you be content to lose the entire sum contributed? Before making this contribution you should be aware of the risks in losing control over the funds. If the family member is made bankrupt or the property is repossessed (often sold for a lower price with escalating costs) then both you and they could lose the entire sum.
If your family member is married or if there is a likelihood they may get married following the purchase, then you need to be aware of the risks involved. Unless you have secured this contribution and made it clear that it is a loan then the funds are likely to be treated as matrimonial assets to be fought over as part of a divorce.
If you are concerned about this risk then please speak to a Solicitor.
Declarations of Trust
There may be a temptation to consider these an unnecessary additional expense at an already expensive time of buying a property. Unfortunately we have seen the very costly consequences of failing to put one in place where the circumstances demand. In addition to maybe losing some of your equity there will undoubtedly be legal costs incurred in arguing about who gets what.
A Declaration of Trust can either be between just the owners of the property or the owners and a third party who may have made a contribution to the purchase price in return for a share of the sale proceeds.
They can not only set out how the proceeds of sale are to be divided but also the process which should be followed should one party wish to sell the property or buy the other party out of their interest in the property. It can also cover what happens if one party makes home improvements which increase the value of the property or if you are making unequal contributions to the mortgage payments.
A Declaration of Trust can help protect your interest if you are investing/lending the money but even if you are gifting the money you may want to discuss with your family member the fact that if they have a Declaration of Trust it may assist in the family funds not leaving the family if they were to separate from their partner in the future.
If you are lending the funds rather than gifting them then you should consider securing this by way of a Charge registered at the Land Registry. Not only will this give you peace of mind but it can also provide clarity between the parties as to what the terms are, hopefully avoiding awkward conversations or family rows in the future.
If you would like to consider this option then please contact a Solicitor to discuss this.
Inheritance Tax and Care Home Fees
One of the reasons you might be intending to make this a gift rather than a loan may be because you wish to avoid Inheritance Tax being payable upon this portion of your estate. You should speak to a Solicitor to ensure that intentions will actually be achieved. You may wish to read our helpful leaflet about gifting your home to a family member and please do not hesitate to contact us (or please click here)
If you have gifted money to a family member which leaves you with limited resources and you then require care which needs to be paid for you may find the Local Authority will seek to argue that you have intentionally deprived yourself of assets.
Can you afford to lose the money or have this tied up long term
Can you afford to tie this money up for a long time or lose it altogether? What would happen if your own circumstances changed and you need additional care or medical treatment and needed quick access to funds. The golden rule should be do not gift or loan money; no matter how much you want to be helpful unless you can afford to live without it.
DO NOT gift or lend money without taking both legal and financial advice as to the full implications for you.
If you would like any advice on any of the above points please do not hesitate to contact us. We have very experienced professionals who can advise on all of the above points. For a no obligation initial chat please contact Rachel Gaylor or any of our Conveyancing Team at The Head Partnership Solicitors LLP on 0118 9756622