Evidence from the Institute for Fiscal Studies suggests that parents fund almost half of first-time home purchases by buyers in their 20s with the average sum given standing at £25,000. It is not hard to see why: property prices have accelerated well ahead of wages over recent decades, and it now takes many more years for an aspiring buyer to save up a deposit.
Further, high interest rates have also meant that many first-time buyers cannot afford a property purchase without the income of a partner.
Finally, gifting capital to children so that they can get onto the property ladder makes for sensible inheritance tax planning: live for 7 years after the gift and there is no tax payable on it on death. With nasty surprises expected in the forthcoming budget, this may be a particularly attractive incentive at this time.
Problems will typically arise when a relationship breaks down, perhaps years later, and the parents claim – in the context of a child getting divorced, in ancillary relief (i.e. financial) proceedings – that the ‘gift’ had not, in fact, been intended as a gift at all but rather as a loan to the young couple, which now must be repaid. The line separating a gift and a (‘soft’) loan is often blurred within families, sometimes deliberately so to permit flexibility as regards an uncertain future event precisely like a divorce. How would a court decide which it had been?
If the parents take a charge over the property securing the money, then this will be indicative that it was indeed a loan. However, this rarely occurs and, in many cases, the main lender may not consent to the registration of a second charge behind their own.
It is a fair assumption that, without contrary evidence, the court is likely to start with the assumption that the payment was intended to be a gift. This is in part because of the rather antiquated ‘presumption of advancement’ – a legal presumption which states that where a husband transfers property to his wife, or a father to his child, then in the absence of other evidence the court will presume that the transfer was by way of gift. In all other circumstances the transfer is presumed to be by way of loan (in the case of money). The presumption is rebuttable; in Pettitt v Pettitt [1970] it was said that the weight to be accorded to the presumption is very slight, and that it might be rebutted by the slightest of evidence. It has even been referred to as a “judicial instrument of the last resort”.But, in the absence of any other evidence, the presumption will likely still apply.
Much will turn on evidence contemporaneous to the payment, as distinct from what everyone says was intended perhaps years later. A written agreement is unlikely, but what else is there? Emails? Text/WhatsApp messages? Professional financial planning advice? Have any partial repayments been made?
Howard Freeman, head of residential conveyancing, says: “This is a very common scenario, and it is important to remember that we act for the purchasers – here the young couple – not the parents who may be funding the purchase. To combat money laundering, the law requires solicitors to obtain and hold satisfactory evidence not only of the identity of each client, but also of all persons who are providing funds to facilitate a purchase. We are also required by law to understand the background and the source of such funds. We send a detailed form to third-party funders – parents included – for completion seeking this information and asking for confirmation as to whether the advance of funds is intended to be an absolute gift or a loan.”
Written confirmation to the solicitors acting for the young couple that the advance was intended to be a gift would be very strong evidence indeed, as would any suggestion that there were inheritance tax-saving motives behind the payment, for there would be no tax mitigation consequences from a loan.
If the payment were to be seen as a gift from parents to the couple or just to their child, then in either case the money would be part of the matrimonial assets available for distribution between the parties upon divorce. Indeed, this could be the case even if it were evidenced as a loan.
Neil Russell, head of Family, explains: “The issue is not straightforward in divorce cases as the court may regard a loan from family as a soft loan that does not have to be repaid. It may be that there are some factors in a particular case which fall on one side of the line and other factors which fall on the other side of the line, and it is for the judge to determine, looking at allf the relevant factors.”
This article has focussed on a claimed repayment of moneys advanced following a marriage breakdown but there are other circumstances in which it could arise too: a falling out between the parents and young couple leading to a demand for repayment; the parents’ need to recover sums to pay for higher-than-anticipated care costs; or a bankruptcy in which the trustee is seeking to realise the property to pay the creditors.
So, the clear advice to parents proposing to help their children in this way is to accept the need to decide at the outset whether the advance is intended to be a gift or a loan and make it clear one way or the other. In the absence of such clarity, it is likely that the law will assume that it was a gift.