Bank of Mum and Dad are battling to reclaim loans from youngsters’s exes

Parents who loan money for property purchases can end up battling their children’s exes to get it back unless they set up safeguards beforehand, warn lawyers.

Relationship breakdowns can lead to conflict over money handed over not only to buy homes, but to pay for weddings and even fertility treatments, according to one law firm.

Sky-high house prices have led many families to give loans or gifts to adult children to help them get on the property ladder, which can lead to problems if they have partners who contribute either less or nothing to the purchase.

But you can put measures in place to protect your money and get it back in case they split up later, which are explained below.

There are an increasing number of cases of well-meaning parents trying to recover money from a child’s former partner or spouse, according to lawyer Kate Booth of Brindley Twist Tafft & James.

She has seen around a 25 per cent rise in cases over the past two or three years where parents and family members have provided money to purchase a property, and the issue of whether this should be repaid after a split becomes contentious.

Most disputes are over whether the cash was initially intended as a gift or a loan, explains Booth.

‘Without a prior formal agreement it can be difficult to prove intent at the time, leaving the other party room to argue it was a gift that doesn’t need to be repaid.

‘The difficulty occurs when what was an informal arrangement is later looked at in a different light. What was a non-issue in happier times can become a significant area of dispute.’

Booth says there is an important legal distinction between gifts and loans, as a court will include the former in the matrimonial pot of assets to be distributed in a divorce, whereas loans are classed as a liability to be repaid.

‘Loans will be deducted from the total assets which results in less overall to divide,’ she says.

‘Issues can be further complicated by whether the courts are dealing with hard liabilities – mortgages, credit cards or commercial loan repayments – or soft liabilities such as loans from family and friends without formal repayment terms.

‘In such cases of soft liabilities, a court may decide there is less priority for repayment.’

Rachel Spencer Robb, partner in family law at Clarion, says the ‘Bank of Mum and Dad’ is behind almost half of first home purchases by buyers in their 20s and the average sum given is £25,000, according to figures from the Institute for Fiscal Studies.

‘When parents give grown-up children and their partners large sums of money, it can be complex trying to get this money back if a relationship breakdown occurs,’ she says. ‘The fact of the matter is that many arrangements are often informal.

‘Unless parents have proper documentation that the money was intended to be repaid, or was only intended to be for one half a couple, then the court is likely to rule the amount was a gift and not a loan and therefore may not be returned.’

Spencer Robb warns there have been occurrences where a parent has clear documentation proving they made a loan and not a gift, but a court can still decide an ex-spouse should keep the money.

‘This is because during a divorce the court must take into consideration all the factors, including the income of the divorcing partners, child arrangements and the length of the marriage and the needs of the parties take priority over arguments as to where funds came from.’

What safeguards should you set up before loaning children money?

Parents can register a charge over the title to the property, which sets out clearly that the loan is there to be repaid, says Kate Booth of BTTJ.

She says pre and post nuptial agreements also offer very clear protection, and declarations of trust between parents and their children and/or their children’s spouses give a clear record of intent.

Here is Kate Booth’s checklist of what to do if you want to loan money to an adult child to buy a house with their spouse or partner.

– Take legal advice of your own, independent from a child and their spouse or partner, and tax advice too.

– Consider whether you intend to have an interest in the property being bought, and if so whether to register a charge on it.

– If you are not registering a charge, consider entering into a declaration of trust to record the intentions at the time and be clear that the money is to be repaid.

– If you don’t make a charge on the property or declaration of trust, you can enter into a formal loan agreement which records the terms of the loan and how it is expected to be repaid.

– You might not be able to bring this about, but your child and their spouse or partner could enter into a pre or post-nuptial agreement if married or cohabitation agreement if unmarried, to record the intentions when money is gifted or loaned and how and when it will be repaid.

– Whether your child is married or not, it is important to have contemporaneous evidence that the matters above were addressed.

How do courts view loans to married and unmarried partners? 

Booth says that if the issues explained above were not addressed, then in divorce cases a court will have a wider discretion to decide what should be included as part of the matrimonial ‘pot’ of assets.

‘The court’s key role when dealing with finances on divorce is to ensure that the spouses’ needs – and those of their children – can be met,’ she says.

‘It is more often in the case of divorces that arguments arise about whether money was a gift or a loan, and if it is a loan whether that is ‘hard’ or ‘soft’.’

Hard debts such as mortgage, credit cards and bank loans will be viewed by the court as needing to be repaid from the assets, she says.

Soft debts such as a loan from family, where there are no formal repayment terms and no or limited repayments have been made, are unlikely to be enforced, she adds.

In that case, a judge has discretion to effectively ignore the loan, and add it back into assets to be shared between spouses as if it was a gift, according to Booth.

She says that if your child is unmarried a court is not open to as much discretion, but in the case of a very short marriage after a long cohabitation its discretionary powers are invoked.

Regarding unmarried partners, Booth adds: ‘The concept of “common law marriage” is not recognised in these cases and even long-term cohabitees generally will not acquire rights against their partner when they separate.

‘The starting point in these cases is how the property is legally owned and the owners’ intentions when they bought it. If there is no documentary evidence of a loan then it will be very difficult for parents to get their money back.

Get legal advice especially if couples put different-sized deposits into a joint property 

‘Parents and third parties need to be clear whether the amount is a loan or gift from the outset and who the recipient is intended to be,’ says Rachel Spencer Robb of Clarion.

‘Pre and post-nuptial agreements are vital to ensure money is not lost on divorce.’

She says getting legal advice is essential for couples putting different-sized deposits into a joint property.

‘Financial agreements are also not legally binding unless drawn up by a lawyer so seeking an experienced family lawyer is vital.

‘Wills are also crucial to ensure money passes on to the intended person so for a parent, do make this clear when dividing assets.’

Spencer Robb adds that if a parent owns a family business and intends to transfer shares to their children, they should not do so unless a child and their spouse has entered a nuptial agreement.

‘Failure to do so could result in a dispute as to whether the business shares are matrimonial.’

What if you made a loan to your child and their relationship breaks down?

‘When I’m acting for a person whose family has advanced the money and is insisting it needs to be repaid, I will look for evidence that supports it was a loan,’ says Kate Booth of BTTJ.

‘Is there a written agreement? Were there emails? Have repayments been made? Quite often we find there may have been really large payments made shortly before the issue of proceedings.

‘In such cases we will go through bank statements, ask questions on such payments and request further evidence.’

Booth notes that where there have been repayments over a long period of time, this suggests everyone agreed the money should be repaid.

But she says if there is a sudden repayment around the time of a separation and court proceedings, this is more suspicious and could suggest one spouse is trying to diminish the matrimonial assets.

Kate Booth says that when gathering evidence she will look into the following issues.

– Has the parent registered a charge on the property?

– Was there a declaration of trust?

– Is there evidence any of the parties got legal advice at the time the money was provided?

– Does the conveyancing file at the time of purchase make any reference to the funds provided by the parent?

– Is there a formal loan agreement?

– Is there documentary evidence of how the parent expected the money to be repaid?

– Are there contemporaneous documents, emails and text messages that give evidence of the parties’ intentions?

– Have the child and their partner made any repayments?

– Would the parent be likely to sue the child for payment?

– How much did the parent provide to the child, both in the context of the matrimonial assets and the parents’ own wealth?