New figures released in June 2019 from Legal & General and the Centre for Economics and Business Research reveal the average contribution from the Bank of Mum and Dad (BoMaD) has increased to £24,100 – a rise of £6,000 from last year.
This makes BoMaD the 11th largest mortgage lender in the UK, an increase of 11% on 2018.
So what are the key things to consider if you’re thinking of lending money to your children?
The key is to be clear about what you’re agreeing to:
• Is it a gift, loan or an advance of inheritance?
• If a loan, what are the repayment terms?
• Will the parents own a share in the property purchased?
• Is the payment part of wider financial planning?
Each option has its advantages and disadvantages so it is crucial for both you and your children to take advice and, before any money exchanges hands, agree what is going to happen. This helps prevent disputes further down the line.
If asked to help towards the purchase of a property, a key consideration should be whether your child’s spouse or partner will share in the money or property in the future. No one likes planning for separation but parents need to have an eye on their child’s current or future relationships and the legal claims if that relationship breaks down.
On divorce, a spouse can make a variety of financial claims including for a lump sum of money, ongoing maintenance and a transfer of property which is owned by the other spouse.
An unmarried partner can still claim to be entitled to a share of a property unless you have taken the necessary preventative steps. This is a complicated area of law but involves looking at who has paid what towards the property and if there were any agreements or promises made about who would own it.
Owning a share of the property
If the intention is that BoMaD will own a share in the property, a declaration of trust will clarify exactly how the equity is divided (who owns what) and prevent misunderstandings and disputes further down the line. This gives comfort that the share owned by BoMaD will be returned on the sale of the property or some other trigger event. There are likely to be tax consequences with this option, so you should take proper advice before investing in the property.
Gifts and loans
Parents who want to keep wealth in the family for future generations should avoid gifting money outright to their children.
Advancing money through a properly documented loan offers far more protection. The more formal the arrangement, the more protection it offers.
Cohab agreements and pre- and post-nups
It is not just up to parents to protect wealth. Children can take steps themselves to secure or ring-fence assets. Cohabitation agreements and pre- and post-nups clarify who owns what, how finances will be managed and what will happen if the relationship breaks down.
Remember that agreements must always be entered into properly and with the benefit of legal advice to ensure the best chance of being upheld.
Trusts and family investment companies
Placing the money in a trust or a family investment company (FIC) and ensuring your child is not the ultimate beneficiary can also provide effective security against future claims. It is vital though to take specialist advice, not only on setting up the trust or FIC, but on its ongoing management to prevent any suggestion that it has become a “nuptial settlement”, which can be questioned later in any future divorce proceedings.
For wider family financial planning, ideally any agreement should reflect a family constitution which has the overall aim of preserving wealth for future generations. A family constitution can be a very effective way to limit disputes or avoid them altogether. It also helps engage children with wealth protection planning.
The exact terms of a family constitution will depend on the specific circumstances of your family. All constitutions usually set out clear statements of principle and the wider family’s intentions regarding its wealth.
Although it is not in itself legally binding, each family member signs to confirm his or her individual commitments. These can include an acceptance that family assets are to be ring-fenced from each individual family unit and that the overall management of the assets is for the good of the wider family, even at the expense of or contrary to the wishes of an individual or their partner or spouse.
It can also require each family member to enter into a cohabitation agreement, pre- or post-nuptial agreements and have a will complying with restrictions on the devolution of shares or other family assets.
A bright future for the BoMAD?
Whatever your circumstances, there are steps which can be taken to protect you wealth both now and in the future. Which option is most suitable will depend upon your aims so it is always important to take specialist advice early on.