The ‘Bank of Mum and Dad’ – how to protect the gift
We have known for several years that the ‘Bank of Mum and Dad’ was playing a large part in helping many first time buyers on to the property ladder, but new research this week has revealed the extent of that involvement. British Parents and grandparents will gift or lend over £5 billion to their children or grandchildren for this purpose in 2016.
The research suggests that this sort of familial lending would make the ‘Bank of Mum and Dad’ a top 10 mortgage lender in the UK if it was a bank its own right, involved in one in four residential property transactions this year. On average, parents provide a deposit contribution of £17,500, or 7% of the average property price.
If couples buy a house together, what can you do to protect the gift made by one of the party’s parents? If the couple were to unfortunately split up in the future, be declared bankrupt or (at worst) die, what would happen to this gift when the property is sold?
If the money is declared as an outright gift (and mortgage companies often require this to be the case, rather than allowing a loan) then the starting point in law is likely to be that this is an outright gift to both of the homebuyers, rather than just one. But what if the parents want to make sure that, in the event of a sale of the property, the gift follows their child, rather than being shared between their child and their partner? Entering into a formal Declaration of Trust allows the gift to be protected in this way.
A Declaration of Trust can ‘ring fence’ the value of the gift to one party, so that, in the event of a sale, that gift is returned to one party in full (subject to the level of equity in the property at the point of sale). By way of an example, if John and Sarah bough a house together, and John’s parents paid £30,000 towards the deposit, and John and Sarah each contributed £10,000, the Declaration of Trust can determine that the first £40,000 of any equity from a sale goes to John, and £10,000 to Sarah, rather than John and Sarah each walking away with £25,000.
Without a formal Declaration of Trust, in the event of a breakdown in the relationship later on, couples might find themselves fighting over the equity in the property through the Courts, which is a stressful and sometimes costly exercise. Entering into a formal Declaration of Trust offers an element of certainty to all parties, to allow for any unforeseen and unexpected changes in circumstances.
If you would like to discuss entering into a Declaration of Trust for a property that you have already bought or are soon to buy, contact our Property team on 0345 20 73 7 8 or email email@example.com
Declarations of Trust can usually be prepared on a fixed fee basis, so there are no hidden charges.