Division of Assets in Divorce – The Dangers of the Bank of Mum and Dad

Monday, February 3rd, 2020

It is becoming increasingly common for family solicitors to be faced with disputes over the division of assets that include argument over whether a sum given to one person was a gift, loan or advance on an inheritance etc from a parent to their adult child. What was intended to be a kind and generous gesture becomes the focus of heated debate, sometimes with very expensive legal fees.

Example: parent provides their child with £50,000 to help them put down a deposit to purchase a property (often with a partner – either married or unmarried). The young couple thereafter divorce/separate. The partner whose parents provided the £50,000 will want that sum taken into account in the division of assets such as the property. They will say it was a gift to me and so I should have their £50,000 back, or possibly the parents wade in and suggest they want their £50,000 back as it was not a gift at all but a loan that is now repayable, or sometimes the parents will say they perceived their £50,000 as not even a loan but a stake in the property (in legal terms they assert that a constructive or resulting trust exists giving them a beneficial interest in the property). The other partner may argue that it was a gift to the couple and so should not revert to the parents. More often than not, none of this is subject to any formal written agreement. This means it becomes a messy free-for-all.

One problem is that most people purchase property with the assistance of a commercial mortgage as well as the contribution from Mum and Dad. The conveyancer acting on the purchase will also usually act for the commercial lender and have to protect their interests. They must report on the title to the lender and are obliged to provide the lender with a Gift Declaration signed by Mum and Dad confirming that the sum being provided is a gift, is not repayable and is free from any equitable or legal interest in the property.

Years after the parents forget about this and then it is particularly difficult to reconcile their Declaration with any subsequent claim that the sum was a loan, let alone a sum that conferred upon them a beneficial interest.

In family law proceedings regarding division of assets, loans from family will usually be seen as ‘soft’ and will not be brought into account. To ensure that such loans have as much chance as possible as being considered ‘hard’ they should be drawn into a formal loan agreement at the time of loan. At the time of any dispute, if no such formal agreement exists, there would be a strong argument for the loan to be considered ‘soft’ and not taken into account. In assessing this one would look for formal documentation and also look for evidence as to whether the child/couple were making repayments.

If there is confusion and dispute about what the terms of the contribution were, then this can all too often aggravate an already difficult situation. In the worst-case scenarios, matters go to court and the parents may be called as witnesses. In addition, the parents may be advised to take proceedings themselves to enforce repayment or to apply to court for a declaration of their beneficial interest, often intervening in their child’s divorce to assert such claim.

So, it is sensible to have open and frank conversations upfront about what Mum and Dad expect. Also committing the understanding to writing in a simple deed of gift or loan agreement signed by the parents, their child and, if applicable, their partner can avoid disputes later on down the line (whilst of course appreciating the requirements of any commercial lender).

Mum and Dad should also of course carefully consider their positions and it would be as well for them to take advice on the tax implications of any such gift or loan.

Hanne & Co’s Family & Divorce Law team has experience of dealing with Mum and Dad and with parties on divorce (as well as on property disputes concerning unmarried couples) when division of assets becomes an issue. Having specialists in family law, private client and conveyancing can help us join up all the dots and give you the best level of advice possible. Contact us on 020 7228 0017 if you need advice

 

Division of Assets in divorce - Elizabeth Francis of Hanne & Co's Family & Divorce team looks at the issue.

Elizabeth Francis is Hanne & Co’s Managing Partner and specialises in Family & Divorce Law.