The “Bank of Mum & Dad” Guide to Protecting Your Money

The “Bank of Mum & Dad” Guide to Protecting Your Money
The “Bank of Mum & Dad” Guide to Protecting Your Money

Now more than ever, family and friends are stepping up to assist others in getting onto the property ladder by offering financial support.

Recent research indicates that the median parental contribution stands at £30,000. However, this same research reveals that family and friends often fail to clarify whether this financial assistance is a loan or a gift. Additionally, only 14% of these individuals seek legal advice to safeguard their money before providing it.

This type of financial aid can be immensely valuable and may be the sole means for some individuals to purchase property. Nonetheless, complications arise when relationships falter, often leading to litigation due to the absence of proper arrangements for protecting the money.

A notable scenario occurs when a parent loans money to their child for property purchases. In cases of divorce, if the child’s spouse disputes that the money was a loan intended for repayment from the financial settlement, litigation becomes inevitable. Such litigation incurs legal fees in addition to the loan amount and can escalate the overall costs for the divorcing parties.

Loan or gift?

In divorce cases, the legal presumption, in the absence of contrary evidence, is that money received from family and friends is deemed a gift.

If the intention is indeed for the money to be a gift, meaning there is no expectation of repayment, the recipient may consider drafting a Living Together Agreement, often known as a Cohabitation Agreement. This document would outline each party’s contributions. For those planning marriage or already married, it’s advisable to consider a pre- or post-nuptial agreement detailing the treatment of funds provided by family or friends in the event of divorce.

Money lent by family or friends may sometimes be termed a ‘soft’ loan, which differs from a ‘hard’ loan. The court in P v. Q (Financial Remedies) [2022] EWFC B9 provided guidance on this, suggesting that a hard loan may exhibit the following characteristics:

  • The obligation is owed to a finance company.
  • The terms resemble a standard commercial arrangement.
  • There is a written demand for repayment or the threat of litigation or intervention in financial remedy proceedings.
  • Enforcement of the agreement is prompt, and the loan amount is substantial enough that creditors are less likely to waive the obligation partially or entirely.

The court may determine that a loan is a soft one under certain circumstances:

  • The obligation is to a friend or family member with whom the borrower maintains a positive relationship and who is unlikely to desire hardship for the borrower.
  • The obligation originated informally, and its terms do not resemble a typical commercial agreement.
  • There has been no written request for repayment, despite the due date passing.
  • There has been a delay in enforcing the obligation.
  • The loan amount is such that the creditor might be more inclined to waive part or all of the obligation, although the specific amount is not necessarily decisive.

If the money is a loan that you expect to be repaid, it is advisable to protect it by drafting a Declaration of Trust. This document can outline property ownership details, including shares and specify the family members or friends involved, along with loan particulars. A properly prepared Declaration of Trust is challenging to contest in financial remedy proceedings.

To further secure the loaned money, the friend or family member may consider having a legal charge drafted and registered against the property’s title with the Land Registry. Additionally, a loan agreement could be appropriate.

Consistent repayment behaviour by the recipient can help clarify the nature of the contribution if disputes arise during divorce proceedings.

Intervention in proceedings

In situations where no protective measures have been implemented to safeguard a financial contribution and there is a dispute during divorce financial remedy proceedings regarding whether the contribution was intended as a gift, it is possible to intervene in the proceedings.

An intervener would apply to the court to be added as a party to the proceedings. Once joined, the court will issue various directions concerning the claim. The court will then decide the claim as a ‘preliminary issue’ before the divorcing parties proceed to the stage of financial remedy proceedings, where they attempt to reach a settlement.

In the absence of a Declaration of Trust, Charge, or other supporting legal documentation, the court would need to determine whether your financial contribution creates a ‘beneficial interest’. Claims regarding beneficial ownership fall under the Trusts of Land and Appointment of Trustees Act 1996 (TOLATA).

Before applying to become an intervenor, it is crucial to seek specialised legal advice to assess the merits of your claim. If you are defending against a claim, seeking specialised legal advice is also important, as standard cost rules in family proceedings do not apply. Similar to civil proceedings, the court has the discretion to issue a costs order against the unsuccessful party.

In certain cases, particularly where the money is claimed to be a loan from family, the court may request a detailed statement from the alleged lender initially rather than immediately inviting the lender to intervene.

Seeking legal advice early on to clarify the terms of the financial contribution and repayment expectations is essential. Here at DLS, we specialise in divorce and cases involving third-party intervention, and together with our conveyancing and dispute resolution experts, we are available to offer comprehensive legal counsel.

Avatar of DLS Solicitors by DLS Solicitors
29th April 2024
Avatar of DLS Solicitors
DLS Solicitors

Our team of professionals are based in Alderley Edge, Cheshire. We offer clear, specialist legal advice in all matters relating to Family Law, Wills, Trusts, Probate, Lasting Power of Attorney and Court of Protection.

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