Guest Post: Key Things to Consider When Making a Gift or Loan to Married Children
Today I have a guest post on what can become a major issue for parents when making gifts or loans to their married children. Specifically it looks at what you can do to ensure that your wishes are respected should the worst happen and the marriage fails.
The article is by Joanna Toloczko, a partner, family law solicitor and mediator at UK law firm RWK Goodman.
Over to Joanna then…
According to the UK House Price Index in August 2023, the average house price in the UK was £291,000 and in London a whopping £536,000. To put this into context, the average house price back in January 2013 was £167,716, representing an increase of around 73%.
A bank or building society will normally require a minimum deposit of between 10% and 25% of the property value as a term of a mortgage offer, and the more you are able to put down as a deposit, the lower rate of interest you are able to secure. It is not surprising, then, that an increasing number of married couples rely on a contribution from one or both sets of parents for their deposit.
In my work as a family lawyer and mediator I often come across cases where a divorcing couple are at loggerheads about whether such a contribution was a loan or a gift. The party whose parents provided the funds will often argue that the funds were a loan which should be returned to their parents before the remaining funds are distributed between the husband and wife. The other party will usually argue that the funds were a gift and are available for distribution between the parties.
If the couple are not able to reach agreement and the case proceeds to court significant sums of money can be spent on arguing this point as a preliminary issue. Very often the parents will be drawn into the litigation.
Even if the Court accepts that the funds were a loan, it is possible that the Court will take the view that it was a “soft loan”, i.e. a loan where repayment is unlikely to be enforced. In these circumstances, the Court may choose to disregard the liability.
Usually, at the time the funds are made available to the couple no-one has formally addressed the issue of the nature of the advance. Everyone is excited about the new house purchase; no-one anticipates that the marriage may fail.
So, what can be done to ensure that gifts made to married children stay in the family of the parents making the gift, in the event of a divorce?
If the funds are being advanced to assist with the purchase of a property, a Declaration of Trust can be a useful tool. In this situation the married couple are the legal owners of the property and hold the property as “tenants in common”, which means that they have their own distinct share in the property. The Declaration of Trust can be used to set out the beneficial interests in the property, including the interests of third parties. For example, a Declaration of Trust could make it clear that as parents had contributed to the purchase price of the property, they are entitled to a specified share of the equity. Alternatively, the Declaration of Trust could set out that once the property is sold, the parents have to be reimbursed prior to the distribution of the remaining equity between the couple.
If parents are to receive a share of the equity, they need to be aware of a potential Capital Gains Tax liability, should their interest in the property increase in value.
Another alternative would be to use a formal loan agreement or for the parents to take a Legal Charge over the property. A Legal Charge works like a second mortgage. It is secured over the property and registered at the Land Registry. The Charge sets out details of the sum loaned to the couple, whether interest is payable and when/in what circumstances the parents are entitled to call for repayment of the loan.
Nuptial Agreements are also becoming more popular. These can be entered into either before the marriage (Prenuptial Agreement) or during the course of the marriage (Postnuptial Agreement).
These agreements make clear what is to happen to the couple’s assets in the event of divorce or separation.
If parents are gifting money, transferring properties, leaving an inheritance, providing an interest in a business, etc, and they wish to protect those assets in their child’s favour in the event of separation or divorce, a Pre- or Postnuptial agreement can be an extremely useful document.
Although Nuptial Agreements are not legally-binding and can be over-ruled by a judge in the divorce proceedings, if they are prepared in the correct manner, they have good prospects of being upheld or will certainly be heavily influential on the judge.
In summary, when advancing funds to a married child, always be clear about whether the funds are a gift or loan and seek legal advice about how best to ensure that the funds remain in the family in the event of a divorce. It is usually also a good idea to discuss any tax implications of your plans with an accountant or tax adviser.
Joanna Toloczko is a partner, family law solicitor and mediator at RWK Goodman and can be contacted on 07553 058485 or at Joanna.Toloczko@RWKGoodman.com.
Many thanks to Joanna Toloczko (pictured, below) for an informative and eye-opening article. Please do check out her company’s website (linked above).
While nobody likes to think about the marriage of their offspring failing, the reality is that an estimated 42% of marriages in the UK today will end in divorce. So it is vital to be realistic and ensure that, should the worst happen, any money you give or lend is returned or divided in accordance with your wishes.
As always, if you have any comments or questions about this article, please do leave them below.
November 3, 2023 @ 12:14 pm
I retired circa 13 years ago but I worked as a legal secretary for a time and I recall a client couple having a legal charge to cover a loan from the parents of one of them to help with the purchase (or was it strictly speaking the parents who had the charge?). I never had children but I can understand that parents may feel constrained because of the emotional ties they have to their adult offspring.
During the pandemic when I was largely confined to my home I got into the habit of sometimes watching videos based on postings on various sub-reddits. While some of them came across as attempts at creative writing some of them seemed plausible and there were occasions where people had made generous loans to family members (not necessarily to adult children – sometimes it was to siblings) and never got them back. It is a pity but maybe folk need to switch off their emotions and imagine they are partaking in a business transaction. The son of a married friend of mine (not living in the same town as me) wanted Mum and Dad to swap homes with him and his girlfriend, I think when his GF was expecting their first child. That’s some years ago but my pal closed that down double quick.
November 4, 2023 @ 9:17 am
Thanks for sharing your thoughts and experiences, Patricia. Yes, sadly these situations are not uncommon and can result in considerable heartache (and worse) for parents. As you say, it’s important to take a businesslike approach when making gifts and loans to married children, as personal circumstances can and do change.
November 4, 2023 @ 12:16 pm
I realise I didn’t specify that the purchase was a property purchase but the fact there was a legal charge involved would make that clear I guess.