Don’t bank on getting your deposit back without legal advice

17/07/2020

The coronavirus pandemic has affected all aspects of life including the property market, which took a nosedive just as the usual home buying season kicked off.

With restrictions on estate agents now lifted to try and inject some much needed life into the market, house sales are picking up and that could mean the bank of mum and dad being called back into action to help with the costs of purchase or fill a gap in the deposit if the ability to borrow on a mortgage has reduced.

Emma Smith, a Senior Solicitor in our Family team, has this advice for potential parental lenders:

As the property market starts to take off again, the bank of mum and dad is once again stepping in to provide deposits to children who might be buying their first homes with their partners.

Around £5bn a year is estimated to be lent between parents and children to get them on the housing ladder, with mum and dad helping to finance around 25% of all UK property purchases.

As generous as this may be, if your child’s relationship with their partner or spouse breaks down, then the deposit from the bank of mum and dad is not automatically protected and there is no guarantee it can be recovered or ringfenced when the house owners split their assets.

The legal rights between cohabitees on separation are not the same as if the parties are married or in a civil partnership. In either situation, parents might find it difficult to recover their money or ensure it is preserved for their child rather than being given to their partner.

To safeguard against these potential problems, if parents are considering providing a deposit to their children, they should consider entering into a Declaration of Trust to protect their investment.. This is particularly important if the parties are making unequal contributions as, depending on how the Transfer Deed is completed upon the purchase, the usual situation is that the equity is owned jointly and equally and this is a high bar to overcome, even if the underlying contributions are different.

There are other options available to the bank of mum and dad too. They can buy the property with their child but that would be classed as a second home and have its own tax implications for parents.

In all cases we recommend seeking financial and legal advice so parents know exactly what the implications and their options are, for themselves, their children and for any tax consequences.

Emma advises on all family matters and specialises in divorce, separation, cohabitation, financial matters arising from relationship breakdown and disputes involving children. 

If you would like to find out more or discuss the above, you can contact Emma using the details below.

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