A recent High Court decision starkly illustrates the pitfalls when parents lend money for house purchases and rely on family ties rather than legal contracts …
David & Glenda Joy from Bude in Cornwall lent their daughter Lucy £90,000 which they said was a loan but she said was a gift. The Court agreed with Lucy and David and Glenda now face a bleak retirement after re-mortgaging their own home to provide the funds.
There are three ways for parents to help out their children: through an outright gift, as an interest-free loan, or as an investment, but the first and last have tax implications.
In the case of an outright gift, if the parent dies within seven years of handing over the money the child may have to pay inheritance tax. Likewise, the parent may have to pay capital gains tax if the money is lent with interest and the value of the property increases.
If a parent is lending rather than giving money, it is vital to get that established in a formal legal document to prevent confusion and distress if circumstances change. Problems could arise if a parent dies and the surviving spouse needs the money back to live on or to pass to other children to meet the terms of the dead parent’s will, or the marriage or relationship of the child break down.
An example would be where a parent lends his son a sum of money to buy a home with his new wife. The son dies shortly after getting married and without yet drawing up a will. The money will automatically pass to his spouse, despite the fact the parents and son intended it as a loan.
The document doesn’t have to be complicated. It can be a very clear and simple statement of effect, so long as it is signed by all the parties. It does need to contain details about the basis on which the loan has been made, what will happen to the money if one of the parties dies, or the child and spouse or partner split up, or if the parent needs the money back.
The situation is simpler if a parent is lending to a single child. However, it still needs to be documented because circumstances can change, people can fall out.
Likewise, people who are marrying should do the same if they are entering the relationship with disproportionate amounts of money. This can prevent rows over who owns what proportion of a property when one partner has been paying the mortgage and the other all the household bills. These cases can be sorted out in court, but the result will depend on the facts or the credibility of the witnesses.
If you would like to discuss this or any property issues further, please contact Charlotte Owens.