With the rise of the cost of living, it’s no wonder why around 318,400 house purchases are supported by the bank of Mum & Dad. The total value of gifts made by parents to their children is recorded at around £8.1 billion.
But when a couple decides to part ways, how does the Court take into account the bank of Mum & Dads contribution?
Well this depends on if it was a ‘gift’ or a ‘loan’.
A gift will be included in the overall matrimonial asset ‘pot’ which the Divorce Court will divide between a couple.
A ‘loan’ is trickier and will depend on whether it is classed as a ‘soft loan’ or a ‘hard loan’.
- Soft loans – these are typically informal agreements made between friends or family members. The terms are more relaxed and can include interest free or payment terms to the debtors discretion or financial situation. There is also usually little demand for the debt to be repaid.
- Hard loans – these are formal agreements, usually in writing, with the terms being similar to those you would see in a commercial agreement.
If the Court decides that the loan is a soft loan, it is more likely to take the view that it will, not need to be repaid and can lead to the agreement being ignored.
Ultimately, the Court will be looking at the loan to determine the likelihood that the loan will be enforced.
There are a couple of ways you can try and prevent an ex-partner from taking a bite out of your family’s finances.
- Formal loan agreement – you can arrange for a formal contract to be drawn up before the money is lent which will outline the terms of the agreement and include a repayment schedule.
- Declaration of Trust – Where the bank of Mum & Dad make a significant contribution to the purchase of a property, a Declaration of Trust will set out the contribution as a percentage of the share in the equity. This is a legally binding document which means that on the sale of the property the net proceeds will be divided up into the percentages set out in the declaration.
For example if the purchase price for the house is £500,000 with the couple each contributing a £200,000 each (for a 40% each share in the property) and the bank of Mum & Dad contributing £100,000 (for a 20% share) then with a Declaration of Trust the couple will each receive 40% of the net profits and the bank of Mum & Dad will receive 20%. If there is no Declaration of Trust then the couple will each receive 50% of the net profits.
To find out more contact me Carla Hazelwood on 01663 743 344
