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22 April 2021
Unmarried, cohabiting couples are the fastest-growing type of family, with an increase of more than 25% in the past decade. As house prices continue to rise faster than average incomes, many young people are turning to the 'bank of mum and dad' to help with their first property purchase.
While such scenarios are increasingly common, they give rise to a number of legal issues. For example, if parents provide their daughter with funds to buy a flat in her own name and the daughter wants her boyfriend to move in, could he have a legal or financial claim on the property if they split?
Before an individual funds a purchase for a family member, it is important that they think carefully about the help which they are agreeing to provide and are clear about the terms on which they are providing it.
For example, are the funds being lent or gifted? Individuals can enjoy tax advantages when making gifts during their lifetime, but a gift is irrevocable and should be made only if the gifter can truly spare the money. Individuals also need to bear in mind that once they have made a gift, they have little control over what the recipient does with it.
A loan does not have the same tax advantages as a gift but can provide greater flexibility. It is important to be clear about the terms of any loan – namely:
Individuals should also bear in mind that a court may look behind the loan documents when deciding whether there is a true expectation that the loan will be repaid. There are many cases where courts have decided that a loan between family members is 'soft' and that the lender will not in reality insist on repayment.
A properly drafted loan agreement, clearly setting out the terms of the loan, is essential. If the loan is to assist with a property purchase, the lender should consider registering a charge against the property, in the same way in which a bank or building society would, so that they are notified if the property is sold or another loan is secured against it.
With regard to the above example, the parents must think about to whom they are making the loan or gift. For example, if their daughter and her boyfriend are purchasing a flat with the loan in joint names, the parents should be clear that they are making the loan or gift to their daughter, not to her and her boyfriend jointly, and should insist that this is reflected in the ownership of the property.
Ordinarily, someone's partner could not acquire an interest in their property simply by living in it. However, in reality, it is easy for situations to arise whereby the partner does acquire an interest.
For instance, with regard to the above example, if the boyfriend received an inheritance and used this to fund an extension to the property, he could potentially claim that a resulting trust had arisen, whereby he acquired an interest to the value of the contribution which he made and any increase in value attributable to that contribution.
In addition, the daughter and her boyfriend may decide to start a family. If, for example, the boyfriend earns less, he may offer to give up his job and become a stay-at-home dad, but may express concern that doing so would leave him economically vulnerable if they split up. To reassure him, the daughter may promise that "what is hers is his" and that he will always be entitled to half of the sale proceeds if they split up. In such a case, there is a real risk that the court would decide that a proprietary estoppel had arisen and that the daughter should be held to her promise because the boyfriend had relied on it to his detriment.
Both of these scenarios, and many others, can be avoided if the couple enter into a cohabitation agreement. Such an agreement can record the exact terms on which they own and occupy the property and can deal with issues such as:
Finally, if the couple decide to marry in the future, the situation will change dramatically. Spouses can make financial claims against one another on divorce, irrespective of how property is owned, and the divorce court can order the transfer or sale of property as it sees fit to ensure that the parties' needs, and those of any children, are met. Where one party has acquired assets before the marriage, or expects to inherit assets during the marriage, they are strongly advised to insist on a prenuptial agreement.
For further information on this topic please contact Simon Blain or Helen Marsh at Forsters LLP by telephone (+44 20 7863 8333) or email (firstname.lastname@example.org or email@example.com). The Forsters LLP website can be accessed at www.forsters.co.uk.
The materials contained on this website are for general information purposes only and are subject to the disclaimer.
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