The Bank of Mum and Dad is one of the UK’s most popular lenders. But, as Julian Hawkhead of Stowe Family Law explains, it’s not always a case a happy families
More than ever, parents have been lending their children money for buying property. The ‘Bank of Mum and Dad’ accounts for roughly 20% of all financial transactions in residential property purchases and is likely to lend over £6 billion this year alone, making it one of the UK’s biggest lenders.
Lawyers are increasingly seeing situations in which parents of either the husband or the wife contribute money to help buy or renovate a house and then later on the couple separate. Subsequently, upon divorcing, the parents demand their money back, claiming that it wasn’t a gift, but rather a loan.
Complications
The even more difficult situation arises where, in fact, the money is advanced on the basis that the parents will actually move into the house – into an annex or adjoining property – and suddenly when the couple separates they face losing their home.
This happens when the money they put in was enough to buy a large enough property for everyone to live in but perhaps not enough to then rehouse the parents.
In these situations the parents need to be legally represented separately from the divorcing or separating couple.
They may have participate in the proceedings as a ‘third party intervenor’ – this is someone who ‘intervenes’ in a couple’s divorce to defend or assert their own financial or property interests.
This will enable them to argue their own case to assert their rights to assets that otherwise the court might just divide between husband and wife.
Such proceedings do bring with them risks and further legal costs but can often be the only way to resolve the dispute. Often the claims of the parents need to be clarified and determined before the court can look at the other issues between the husband and wife.
Dad not on the deeds
A case of this nature concerned Mr P who was 76 years old. He had invested over £160k into a property in London which was purchased in 2011.
Mr P had agreed to purchase the property with his son, who was living in London at the time and had recently graduated from University.
In order to help the son whilst he started his career in London, Mr P agreed that he would invest in the property and they would each receive rental income by letting the spare bedrooms out.
Unfortunately, despite having contributed 50% of the property’s asking price, Mr P’s son had to fund the remainder of the purchase with a mortgage and his lender would not accept Mr P on the mortgage title deeds nor could he register a charge to protect his interest.
As a result, Mr P was never registered as a legal owner of the property.
Mr P’s son later married and after approximately seven years together, the parties separated.
Despite the parties having purchased their own property together in Leicester, the wife also wanted to claim a 50% share of the net equity in the London Property which had increased considerably in value.
There was an email trail between the son and his conveyancing solicitor referring to the agreement between Mr P and his son wanting to own the property together but asserting the mortgage provider would not allow it.
Mr P’s son had instructed his solicitor, shortly before the parties’ separated, to prepare a Declaration of Trust but it was only a draft copy, without reference to Mr P’s name, and it was never signed because the son and Mr P had planned to sell the property shortly before the parties’ separated.
The father made an application to join the financial remedy proceedings of his son and daughter-in-law to make sure the parties’ minds were focused on resolving the father’s claim as the preliminary issue before any other settlement negotiations took place.
The wife eventually conceded that Mr P did have a 50% beneficial interest in the property however had he not actively involved himself in the proceedings his interest could have been overlooked.
Living in an annexe
In another case Dad contributed everything he had to build an annexe in the garden of his daughter and son-in-law’s property to live in on the basis that this would be his home for life.
The settlement required the house to be sold to release funds for both husband and wife to rehouse themselves but in the first instance the husband denied that his father-in-law had been the source of funds, necessitating the father to be joined into the proceedings to advance his claim for repayment of the funds.
Gifting money
Problems relating to family financial transactions can go back over years and become complicated and somewhat murky due to a lack of a clear understanding as to what actually happened.
An example of an ongoing case we have currently is a father who gave our client £300,000 in total to purchase and renovate a property.
When the marriage ran into trouble (before the final separation) our client’s father got them to sign and register a legal charge for the full amount. In this way there could be no argument about the amount owed to the father.
However in many situations a charge is not possible. There may, for example, already be a mortgage against the property.
Potential solution
One way to bring clarity to how external assets provided by parents are to be treated is to have either a pre-nuptial or a post-nuptial agreement in place which can identify the ‘non-matrimonial’ assets.
This could be, for example, funds that have been provided by parents and can focus on agreeing what should and what should not be divided in the event of divorce.
It is important to be clear as to whether funds provided by parents represent a loan which is expected to be repaid or whether it is intended to provide that parent with an interest in the property or a right to live there.
Julian Hawkhead is the senior partner at Stowe Family Law
