Is it a gift or a loan? When the ‘Bank of Mum and Dad’ helps out
According to recent reports, not all cases where parents lend their children money to buy homes are ending well with an increasing number ending up in court.
The so-called 'Bank of Mum and Dad' is now the UK's 10th biggest lender involved in one in five property transactions, lending an estimated £6.3 billion to family this year alone.
This represents a cool £1billion increase since 2016 with the average loan now £24,100.
Unfortunately, disputes are also on the rise, many over whether the money was intended as a gift or a loan.
Family money and mortgage lenders
As children will usually be obtaining a mortgage, the family contributions tend to be by way of gift as many lenders will not agree to the borrower being financed by other loans, even if the family member doesn't require payment until a future sale.
Family members are told early in the mortgage application process that requiring the monies to be treated as a loan may 'rock the boat' with the proposed mortgage lender.
The Stamp Duty surcharge for the purchase of an additional residential property also adds complications when dealing with these transactions and the protection of the interests of third parties.
Three important questions
It is crucial to consider aspects including:
- Is the financial assistance a gift or a loan? A simple question but the answer is not always straightforward. The intention may be for the assistance to be repaid at some point but when it comes down to it, other factors may come into play which require it to be declared as a gift;
- Will the buyer require a mortgage from a conventional lender?
- Is there one buyer or more and what is their relationship?
Purchase with a mortgage and family gift
Where there is a mortgage, the conveyancer will usually act for the lender as well as the buyer and so must follow the instructions issued by the lender and look after their interests in addition to those of the buyer.
A buyer will need to give details of the source of funds to their conveyancer. Where this includes third party assistance, typically from parents or another family member, this has to be disclosed by the conveyancer to the lender. This is because it may affect the lenders appraisal of the buyer's ability to afford the mortgage.
Most family assistance where there is a mortgage is by way of a gift. We ask (as is common good practice) that family members sign a declaration to confirm the assistance is a gift, to provide evidence of the source of these funds as well as proof of their identity to meet our money laundering obligations.
Purchase with a mortgage and family loan
Assistance by way of a loan will not be acceptable to a mortgage lender if it is to involve repayments by regular instalments but could be deemed permissible if the repayment was postponed until sale.
It will depend on the lender in each case, and the mortgage advisor should be consulted at the application stage.
Protecting the family gift or loan
If the financial assistance is by way of a loan, whether or not the buyer is taking out a mortgage, the interests of the family member also have to be considered and they should take advice from their own separate conveyancers. They may need to look at their options:
- Being a party to the purchase and on the property title even if they are not to live there;
- Not being on the title but entering into a declaration of trust to specify what their share is;
- Taking a mortgage over the property for the amount of the loan.
More than one buyer
It's common for young unmarried couples to buy their first home with help from parents. Even without a parental contribution, the couple would receive joint ownership advice and if they were contributing unequally they should set out their shares (or how they are to be calculated or determined) in a declaration of trust or 'No Nup agreement'.
The gifting parents in this case may be happy to provide the gift to the couple jointly but, when asked, are rarely happy for this to be shared between the couple should they later separate. The declaration of trust can take account of this.
Higher Rate Stamp Duty Land Tax on the purchase of an additional dwelling
This may reduce options for family assistance where an interest is to be retained of some sort.
Mum and Dad are very likely to own their own home already so if they join in a purchase with their son or daughter, this would then make it subject to the surcharge.
The fact that one of the co-buyers is making their first purchase does not affect this or reduce the tax payable. The first time buyer rate would also be lost.
If Mum and Dad were not to go on the title but look to retain their share by providing for this in a declaration of trust, this would not make any difference. This is what is termed a 'bare trust' and the beneficiaries of the trust are treated as the owners. So the surcharge would still be payable.
If Mum and Dad were to take a mortgage or charge over the property to secure their contribution, this would not result in the surcharge being paid. This option however may not be available where the buyer is obtaining a conventional mortgage as it would require the lenders consent which may not be forthcoming.
It is very important that Mum and Dad consider taking their own independent advice if they are not making a genuine gift to their children for their purchase.
For specialist legal advice on all conveyancing matters, please contact our Conveyancing Team or pop in to one of Wards Solicitors' 11 local offices.