For many young couples, getting onto the property ladder would be impossible without financial support from their parents. Whether it’s a contribution towards a house deposit, help with renovations or a share in a family business, the so-called “Bank of Mum and Dad” plays an increasingly important role.
However, what happens to that money if the relationship breaks down?
A recent article highlighted the experiences of families who have lost substantial sums following their children’s divorces, raising an important question: can parents protect the money they give to their children?
What happens to money gifted by parents during divorce?
According to research by Savills, cited in the iNews article, 53% of first-time buyers rely on financial support from family members.
While these contributions are usually made with the best intentions, problems can arise when a marriage breaks down.
In England and Wales, the Family Court considers a range of factors when determining how assets should be divided on divorce. This includes the couple’s financial resources, their respective needs, the length of the marriage and the standard of living enjoyed during the relationship.
Money gifted by parents to one spouse may be considered a non-matrimonial contribution. However, where that money has been used towards the family home, it can become part of the matrimonial assets available for division.
For example, if parents give their daughter £50,000 towards a deposit on a property purchased jointly with her husband, there is no automatic guarantee that she will receive that £50,000 back if they divorce.
Even where it is clear that the money originally came from her parents, the Court may decide that the equity should be divided differently, particularly where the parties’ housing needs must be met.
Why is it important to distinguish between gifts and loans?
One of the biggest issues arises when parents provide financial support without clearly recording whether the money is intended as a gift or a loan.
If the money was an outright gift, the parents will generally have no entitlement to repayment.
If it was a genuine loan, it may be treated as a liability when considering the couple’s financial circumstances.
However, the Family Court can distinguish between what are commonly referred to as “hard” and “soft” loans.
A hard loan is generally a formal arrangement where repayment is genuinely expected and may be supported by a written agreement, repayment schedule or evidence of previous repayments. For example, parents may have a charge against the couples’ property.
A soft loan is typically an informal family arrangement where there may be little expectation that repayment will actually be enforced.
For example, parents might tell their child that they can repay the money “when they’re able to”. Although everyone may consider this a loan, the Court may give it less weight than a formal debt owed to a bank.
Simply calling a contribution a loan does not automatically mean that it will be protected during divorce proceedings.
What about family businesses and other assets?
It is not just money contributed towards the family home that can become an issue.
The iNews article also highlighted the experience of a woman who held a share in a family property business established by her father. Despite the family origins of the asset, it became relevant to the financial proceedings following her divorce.
Although assets acquired through inheritance, gifts or family businesses may be considered non-matrimonial, they are not necessarily excluded from consideration.
The Court has a duty to consider the financial resources available to both spouses and, importantly, their financial needs.
This means that even where an asset has been kept separate from the marriage, its value may still be relevant when determining a fair financial settlement.
How can parents protect their financial contributions?
There are several steps families can take to reduce the risk of disputes if a relationship breaks down.
Record whether the money is a gift or loan
Before transferring money, parents should consider whether they intend it to be repaid.
Where the contribution is a loan, a properly drafted agreement can record the amount advanced, repayment terms and the parties’ intentions.
If it is a gift, documenting who the gift is intended for may also help clarify the position, although this will not necessarily prevent the money from being considered in divorce proceedings.
Consider a Declaration of Trust
Where money is being contributed towards a property purchase, a declaration of trust can record the parties’ respective beneficial interests and how the proceeds of sale should be divided.
This can be particularly useful for unmarried couples.
However, married couples should be aware that the Family Court has wide powers when determining financial arrangements on divorce and is not necessarily bound by a declaration of trust.
Consider a Prenuptial or Postnuptial Agreement
A prenuptial or postnuptial agreement can help couples establish how they intend to deal with assets and family contributions if their marriage breaks down.
For example, an agreement might provide that a contribution made by one spouse’s parents towards the family home should be returned to that spouse before the remaining equity is divided.
Although these agreements are not automatically legally binding in England and Wales, they can carry significant weight, provided they have been entered into freely, with a proper understanding of their implications, and it would be fair to uphold them.
Obtain legal advice before making significant contributions
The best time to consider protecting family money is before it is transferred.
Obtaining legal advice at an early stage can help ensure that everyone understands the nature of the arrangement and the potential consequences if the relationship breaks down.
What if parents have already given the money?
If money has already been transferred and divorce proceedings are underway, the position will depend on the circumstances.
Evidence such as bank statements, correspondence, messages and any existing agreements may help establish the original intention behind the contribution.
However, where money has been given as an outright gift, it may not be possible to recover it simply because the marriage has ended.
It is also important to remember that divorce proceedings concern the financial arrangements between spouses. Where parents assert that money is owed to them, or that they have a beneficial interest in a property, their position may need to be considered separately.
Protecting the Bank of Mum and Dad
Financial support from parents is often an act of generosity, given to help children build a secure future.
Unfortunately, as the experiences highlighted in the iNews article demonstrate, a lack of clear arrangements can lead to unexpected financial consequences if a marriage breaks down.
Putting appropriate protections in place does not mean anticipating the end of a relationship. Rather, it provides clarity and reassurance for everyone involved.
If you are considering making a significant financial contribution to your child, or are concerned about how parental gifts or loans may be treated following separation, our specialist team can help.
Contact us to discuss your circumstances and obtain advice tailored to your situation.
