With the soaring cost of house prices, the only way for some people to realise the dream of home ownership is with money from family and friends, which is becoming more and more common.
If you’re planning to help a family member to purchase a home, you need to be clear on what basis you are giving them the money and ensure that it is properly documented so that you are both protected against potential risks of future disputes and potential inadverted tax implications.
What do I need to consider?
Below are the top questions you should consider before helping a family member or a friend purchasing their home:
- Is it a gift or a loan?
- If it is a loan, when and how do you expect to be repaid?
- Do you expect to own a share of the property and, if so, on what terms?
- Are you providing the money only to the friend or family member or to their partner (if they are cohabiting) as well?
- What would you expect to happen to the money if your friend or family member were to live with someone and then separate?
- What would you wish to happen if one of them dies?
All too often people provide money without thinking about the options and disputes can arise as a result.
Understand your options
Whatever your intention, ensure there is clear written evidence so everyone understands the position and there is no room for dispute down the line.
- If it is a loan, make sure there is a written loan agreement and it can be helpful to register a charge against the property in certain cases.
- If you want a share in the property, make sure the property is transferred into your joint names and that you own it as tenants in common, with your respective shares clarified by way of a declaration of trust.
There may be reasons why you want to gift the money but, if you do, you need to understand the possible implications of such a gift. That money would be your family member's to use as they wish, not necessarily as you would like, and it may be lost if your family member is married and goes through a divorce or if they purchase a property with their partner and don't take steps to protect their interest.
It's only by understanding your options, considering the implications, deciding what you want to achieve and recording your intentions properly, that you can avoid any unexpected pitfalls along the way.
A recent case of a 32-year-old who purchased a “project” property with his partner as joint tenants. In order to finance the project, he borrowed money from his grandmother for the deposit and from his parents for renovation work. In addition he also spent a large amount of time working on the property. On the other hand his partner made no capital contribution to the property. The relationship ended very badly and now she wants her 50 per cent of the equity. There is nothing in writing with his grandmother or with his parents – a classic example of a failure to protect their investment.