27 November 2015
Why a “loan” to get on the housing ladder may become a gift
With Gerrards Cross property prices among the highest in the county, it’s increasingly difficult for young people to buy a house without help from their parents.
While a lump sum “loan” towards the deposit, or perhaps what might be called an advance on a future inheritance, would no doubt be welcomed by most 20 or 30-year-olds, from a legal perspective it’s not that simple.
Martina Razaq, senior associate in the residential property team at B P Collins LLP, says both parents and their offspring should seek legal advice before going ahead with any such arrangement.
“There’s no doubt that we’re seeing plenty more parents or grandparents wanting to help out financially, but it’s important for both parties to know that the money may have to be treated as a gift in certain circumstances, for example, where the buyer is also getting financial help from a third party mortgage provider.
“This means those making the generous gesture have no legal right to call for its return in the future,” said Martina.
“Of course, that can have implications if, for example, the money is ‘given’ to a son or daughter to buy a property with a partner and they then split up and the house has to be sold. Or perhaps there is a limited amount of money and, having helped one older child, a couple then wishes to recoup the money to help a younger sibling.
“Put simply, a gift is a gift in the eyes of the law, and that’s something not everyone is aware of.”
If a couple is purchasing, one option, she says, is to draw up a Declaration of Trust, which can help to ensure the money stays within the donor’s family.
For example, if parents gift £100,000 to their son and his wife and they then split up, a Declaration of Trust could provide that after the redemption of any mortgage and other expenses, the first £100,000 left over from the net proceeds of the sale would be allocated back to their son.
The remaining balance could then be split accordingly, or alternatively, the shares in which the property is held could be divided so a larger proportion of the balance remains with their son.
“We’re certainly seeing more interest in Declarations of Trust and pre-nuptial style property agreements,” said Martina. “Parents and/or grandparents, whilst happy to ‘gift’ money to their offspring, often want to ensure the money is ring-fenced and stays within the family in the event of a break up and eventual sale. These are different ways to ensure that happens.”
And, although previously parents could sometimes insist on restrictions on the property that preclude its sale without their consent or a legal charge, she says in today’s market it’s something that the majority of lenders would frown upon and would not permit under their mortgage conditions.
Her advice is for prospective homebuyers to be honest with the lender and/or broker right from the start about where their money is coming from, concluding: “We have seen transactions where the day comes for the deposit to be paid and there’s a sudden panic because the money hasn’t been transferred from the ‘bank of mum and dad’.
“That can cause all sorts of problems, not least because when the mortgage application was initially completed, no mention was made of the fact the money was being ‘borrowed’ or officially gifted from a third party. This can ultimately delay an exchange and/or completion, as disclosure has to be made to the lender.
“Money-laundering regulations and the financial crisis that started in 2007 means lenders are now extremely stringent in having to verify where funds come from, who is funding the purchase and who has an interest in the property, so our recommendation is to be open from the outset to avoid any last minute delays or hitches.”