A recent article in The Times stated that families are now providing a record amount of money to relatives to help them buy a home. The total amount gifted has increased from £8.1 billion to £9.2 billion in just a year. This averages out at a contribution of £27,400 per family. A staggering 42% of property purchases by buyers aged under 55 are assisted by family money.
The nature of these family contributions can vary – they are sometimes outright gifts and sometimes loans. It is however rare for families to protect that money effectively, which can lead to significant issues further down the line. While it is to be hoped that the person who benefitted directly from the money rarely falls out with their family (though of course this also happens), complications tend to arise when there is another person in the mix – a cohabitee or spouse of the person who received the funds. On any future separation, it is likely that the family who loaned or gifted the money will want to protect it for their family member, not see that person’s former partner or spouse get to keep a share of it (particularly if the split is acrimonious).
There are various potential routes available by which family funds can be protected, including formal loan agreements and declarations of trust over the property, either between the family and the recipient of the funds, or potentially between the recipient and their cohabitee. However, it’s also important to recognise that documents drawn up by conveyancing solicitors relating to the co-ownership of a property (e.g. declarations of trust) are generally of very limited value if the owners of that property subsequently marry.
Let’s take Jane and John, by way of example. They are not married, but are moving in together and wish to buy a joint property. Jane and John can jointly rustle up a deposit of £30,000, but Jane’s parents agree to provide a further £50,000 as a gift to Jane to help them buy a nicer property. What might happen to those funds?
If Jane and John buy the property as joint tenants, they will own the whole property equally and if they separate, they will each get 50% of the equity in the property. John would therefore benefit from half of the money provided by Jane’s parents, which probably isn’t what either Jane or her parents would have wished. This could have been avoided by Jane and John buying the property as tenants in common and Jane owning a greater share of the property set out in a declaration of trust.
Let’s assume Jane and John do agree to protect Jane’s parents’ gift using a declaration of trust drawn up by the conveyancing solicitor – great. As they are not married, if they then separate, the proceeds of sale will be governed by that document according to property law.
However, if they do not separate but instead marry, the position changes again. Jane and her parents are likely to assume that their gift continues to be protected by the existing declaration of trust. In fact, if Jane and John then divorce, the division of the house (and other assets) will be governed by family law principles, not property law. The family courts can (and frequently do) override the declaration of trust and decide to give John a greater share of the house. This often comes as a shock to clients who have not realised the impact of their marriage on an existing declaration of trust. Had Jane realised at the time, there are steps that could have been taken to continue to protect this family money, usually involving either a prenuptial agreement or a postnuptial agreement.
The above scenarios assume that the money from Jane’s parents was a gift – if in fact it is intended to be a loan to her, the situation changes again and the parents are likely to need independent legal advice on protecting their position, either by way of a loan agreement or potentially their own investment in the property in a declaration of trust. It is unfortunately all too common on divorce for one spouse to claim that family money paid towards a property was a loan which now needs to be repaid and the other spouse to claim it was a gift – if there is nothing in writing to confirm the position, this can significantly increase the costs of resolving the position and can lead to unexpected outcomes for the parties and the relevant family.
Given the various complexities of both property law and family law and the interaction between them, it is a good idea to seek legal advice from a family lawyer on your situation, ideally before the property purchase completes, but if that ship has sailed, there may well still be options available to protect your position after the event. Please contact us to speak to one of our expert family lawyers who will be able to assist on the issues raised in this article.
