Make family loans as safe as houses

Family life is changing rapidly in the UK. If trend-based forecasts are correct, the majority of children born this year will be to unmarried rather than married mothers. Also, courts report that with the changing nature of families, particularly as a result of complex second and third relationships, more inheritances and wills are being contested through the courts – and because of the value of property assets more of these cases are reaching the costly upper courts.

This is an issue for farming families – they are subject to the same social trends in society, and they have assets that families might choose to fight over. The most spectacular example was the Welsh farming daughter who successfully sued her own parents over attempts to deny her the farm she had run and evict her from the property. While the Welsh daughter – dubbed the Cowshed Cinderella in the press – was an extreme example, this and other cases underline the need for families to make intentions clear.

An issue that arises now is not necessarily linked directly to a farming situation. It is a fact of life that the Bank of Mum and Dad now has to come into play when a son or daughter is buying their first home. The average amount involved is around £20,000 towards the deposit. If this is coming from one side of the family, a question that arises is how to protect that money should the child’s relationship break up. This is a difficult issue to raise, as is any conversation when love is in the air and a parent is trying to focus on the possibility of it all going wrong.

If it is a son or daughter buying the property on their own you can give the money as a loan secured against the property, although the bank or building society will have first call if the property is sold to cover the debts.

If it’s being bought in joint names it’s more complicated. If you’re determined to protect your ‘investment’ you’ll need a legally drawn up declaration of trust setting out what will happen if the property is sold. Part of that will be to set out that after other charges are met and the building society repaid, your son or daughter will be legally entitled to the return of the share of the deposit they paid. This should not be over-contentious, since it will just be part of the lots of paperwork they will be signing to acquire the property.

You can justify this approach on the basis that it makes clear that the deposit contribution is a loan. This should have no tax implications, since presumably you will not be charging interest. If you simply give the deposit as a gift, you will need to live for seven years to put it beyond inheritance tax.

These are not easy issues to raise, but it’s unreasonable for children, particularly in the present state of agriculture, to expect parents to dig deep to help them put a deposit on a property with no safeguards. It’s equally unfair, where there is a relationship, for one person to expect their partner’s parents to stump up the funds, with no contribution from their family; they can’t then deem it unreasonable if you attempt to protect that contribution.

Beyond that, urge your son or daughter, if they’re not married, to set out in a will what happens to the property. If they are getting married and there’s a substantial asset involved – for example a share of the farming business – urge your offspring to consider a pre-nuptial agreement that sets out exactly what the position will be in terms of what each person brought to it financially, should the relationship ever break down.

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