What happens to money provided by the bank of mum and dad if their child gets divorced?
The bank of mum and dad can be remarkably generous when it comes to helping their children buy a property. Unlike other banks, BoMaD (as it is known) can also be remarkably naïve when it comes to protecting their money. In this blog, I look at what can happen if a child who has been lent money by BoMaD gets divorced.
The critical question is whether the money forms part of the marital pot for the purposes of the financial proceedings
It's relatively common for parents to lend their child money to buy a home either before or after the child gets married. In many cases, the parents and child don't bother to have either a loan agreement or a legal charge on the property they buy (subject to the consent of any prior charge holder). Given the awkwardness some people feel about money, especially when it involves family, it may not even be clear to the parents and child involved if it is a gift or a loan.
This can have devastating consequences if the child gets divorced. The critical question is whether the money forms part of the marital pot for the purposes of the financial proceedings of the divorcing couple. If it does, some of the parents' money may go to their former son or daughter in law under the financial settlement.
To avoid this, the parents will need to produce evidence that the money was a loan and not a gift. This can be difficult if there is nothing in writing to confirm it.
Various ways of proving money
The ways in which parents can provide money to a child to help them buy a home are:
- A gift.
- A 'soft' loan. This is a loan that is not legally enforceable as there is no formal agreement in place. There are no clear terms such as interest payable, or when and how it needs to be repaid.
- A 'hard' loan evidenced in a legal document that sets out how it is to be repaid and other terms such as whether or not interest is payable.
- An investment in the property ie the parents have a share in the property.
- A legal charge subject to the consent of any prior charge holder.
Even if parents are keen to draw up a formal document showing that the money is a loan and not a gift, they may be deterred by a mortgage lender's requirements. Most lenders will refuse to lend if part of the purchase price has been provided by a third party. Sometimes, they will require a letter from the third party (ie the parents) confirming that the money is a gift.
Joining the financial proceedings
If necessary, the parents can be joined to the divorcing couple's financial proceedings (as intervenors). The court will decide on the evidence in front of it the basis on which the money was provided. If it is established that the money was a 'soft' loan, less or no consideration will be given to it by the court when it decides how the marital pot is to be divided.
Steps parents should take
There a several measures parents can take to protect their position:
- If the money is a loan, they should put a formal loan agreement in place. Where possible, this should be protected by a charge over the property.
- If the money is intended as an investment in the property, this should be confirmed either by a declaration of trust or legal title to the property being jointly in their name.
- The child and their spouse (or spouse to be) should enter into a pre- or post-nuptial agreement (or co-habitation agreement, if relevant) that specifies how the money is to be dealt with if they split up. However, erring on the side of caution, and as set out in my previous blogs, pre-nuptial agreements are not legally binding and so even if this is covered, the court has the power to ignore it and include the monies within the marital pot.
Each situation is different, and the advice given will depend on the circumstances in each case.
The above looks at the situation from the viewpoint of the child in question getting divorced. Other situations that can lead to complications where BoMaD lends money include:
- The child dying before the parents. A few years ago, The Telegraph reported the story of a son who died shortly after his parents lent him a large sum of money to buy a house with his new wife. The son had no will in place and all the money passed directly to his wife.
- The parents requiring the return of the money, perhaps because they themselves are getting divorced. What happens if there is no agreement in place to deal with this?
- One or both of the parents dying, and no provision being made in their wills dealing with how the money in question is to be taken into account when dividing the estate among the child's siblings.
To discuss how to protect your position if you have provided money to your child to buy a property or are considering doing so, please contact me at [email protected].