Is it a gift or a loan? Helping your children on the property ladder.
In an age where a lot of young people and divorcees recovering from the financial split from their spouse can’t get on the property ladder without help from the ‘’bank of mum and dad’’ a reported case in the Daily Mail highlights the importance of recording agreement over property.
The reasons behind why Mr and Mrs Joy gave their daughter £90,000 are complex but in essence the Joy family dispute was simple: was the £90,000 payment a loan, as claimed by Mr and Mrs Joy, or a gift, as asserted by their daughter, Lucy.
After a Court battle a judge has recently ruled that the money was a gift and is not repayable by the couple’s daughter, Lucy. This is despite Mr and Mrs Joy reportedly re-mortgaging their family home to raise the £90,000 for their daughter on the basis of an alleged verbal agreement that Lucy would then transfer an inherited property into Mrs Joy’s name. The key factor in the Court decision was that there was no written agreement or contract between parents and child.
As a family solicitor I am often told by clients that they don’t need a written agreement or document between their family members. The Joy case is a salutary reminder of the importance of writing things down. That is not just because family can fall out but also to protect family members from:
- The donor’s estate being liable for extra inheritance tax as the HMRC might not view a payment to a family member as a ‘’gift’’ without formal evidence;
- The person receiving the money facing a financial claim on divorce and therefore needing to establish that money received from family was a gift to them as an individual or a repayable loan;
- The person receiving the money facing bankruptcy or a Court judgement – without a written document a third party or a Court may not accept that the money was a loan and not a gift.
There are many different ways in which family property agreements can be recorded, such as:
- Cohabitation agreement between cohabiting couples;
- Declarations of trust between joint owners;
- Loan – not secured on the property ;
- Mortgage – secured against the property ;
- Prenup agreements between an engaged couple;
- Postnup agreements – suitable for a married couple who acquire property after marriage, for example, inherited from a parent;
- Record of gift of property or deposit to purchase a property.
Whatever the type of document and however the paperwork is drawn up, the important thing is that there is a written agreement. By spending the time recording the property agreement a lot of time and money can be avoided when it comes time for the loan to be repaid, the property sold or the estate sorted out. The English philosopher, John Locke, said ‘’where there is no property there is no injustice’’. I say ‘’ where there is a written agreement on property there’s normally no injustice’’.