I need help to buy my property- does this make things more complicated?

These days as getting on and moving up the property ladder is getting more and more difficult, many buyers find themselves seeking financial help from relatives- grand-parents or parents.  This is often referred to as “The Bank of Mum and Dad” This guide aims to draw your attention to some of the additional issues this may raise for your purchase transaction.

Mum and Dad have agreed to help my partner and I buy a house – is there anything I need to do before offering on a property?

It is really important to decide from the outset how such monies will be treated as between yourself, any co-purchaser and of course the person contributing monies.  Time spent at this time making sure the detail is correct and everyone is fully aware of the nature of the contribution can potentially save upset later on.

Whatever is decided UK Anti-Money Laundering Regulations must be complied with, showing the source of the money, the bank accounts from which it comes and how it was accumulated in those bank accounts.   Every solicitor, bank and building society have to comply with these regulations. Practically speaking identity documents and bank statements will be required from anybody providing funds towards the transaction.

My Parents are thinking of just gifting a sum of money to enable us to buy the house.

An outright gift – Parents may wish to make an outright gift of money to their son/daughter.  Complications arise when the son/daughter are buying with partners who are, of course, not blood relatives and may not be married.  In these circumstances, the concern is a gift may not be appropriate, because when the house is purchased, then effectively the son/daughter’s partner receives the benefit of a proportion of the gift, depending on how the property is purchased.  Any gift of a significant sum of money may have Inheritance Tax consequences and parents or anyone gifting money should take advice on this from their accountants. If parents are concerned that only their blood relative has the benefit of the funds should for example the property be sold, they should obtain independent legal advice on how best to achieve this. If you are borrowing with the additional help of a mortgage your Lender must be made aware that part of the purchase price is coming from a third party.  Lenders will often look more favourably on gifted monies from a relative when making their decision whether to lend as a gift by definition is not additional borrowing. This is, however, decided very much on a case by case basis.

Your Lender may also have additional requirements to protect their position, including Insolvency Act Indemnity policy, a form of insurance. The cost could range from £80 – £500 depending on the cover required.

My Parents will definitely want their contribution to come to me if the property is sold….my partner is fine with this….is there anything we can draw up to reflect our wishes?

If all parties are in agreement, this can be reflected in a Declaration of Trust entered into by the purchasers simultaneously with the purchase (this should be done at/or before exchange of contracts but ready to be dated on completion).  A simple example is Mum and Dad of Mary gift £50000 to Mary to buy a house with John. Mary and John sign a declaration of trust which shows that after the mortgage and all expenses are paid , Mary receives the first £50000 from the proceeds of sale and any remaining proceeds are divided equally between Mary and John

My Mum and Dad want their monies to be protected by deed, so that if the property is sold they receive their monies before my partner or I receive any share of the proceeds of sale….. I think they are worried we may split up!

There are a couple of options here, but it is important that you bear in mind, whatever you decide, Lenders (should you be getting a mortgage) are quite particular as to what they will accept in this kind of situation.  Importantly your parents should take independent advice which will need to include tax advice and your Lender’s consent should be obtained so that you avoid wasted costs wherever possible.

A.   Your parents may wish to protect their “share” in the property by a Declaration of Trust reflecting either the sum or proportion of the money provided by the parents is to the purchase price.  A Declaration of Trust would need to cover obligations in respect of the payments of mortgage interest and capital. Not all Lenders are comfortable to proceed on this basis.

B.  A loan provided to the son/daughter.  A loan can be recorded by a promissory note, but what is more likely is that the Parents will require their loan to be registered as a second charge against the property.  I Either way the Lender will need to consent. Each mortgage lender has its own criteria. As you will appreciate, Lenders look at all borrowing , no matter who from to decide whether they will lend and on what terms they will lend , so bear in mind Lenders may not be comfortable with this either.  There are lots of factors they will want to assess.

The terms on which you are borrowing will need to be agreed and formalised in a deed which will be registered at the Land Registry.  All parties will need to consider matters such as interest and the amount to be advanced. Will it be repaid as a percentage of the market value when it is repaid or as a sum plus interest…. a lot to think about.  Also have your parents considered their tax position? Again… independent legal advice is a must!

My parents have suggested buying a property with me…. Is this an option?

The parents could be joint purchasers with the son/daughter.  This is not always a good idea because invariably parents who are in a position to do this, may already own their own home which they do not intend to move out of and this would means higher rates of Stamp Duty Land Tax  becomes a consideration. Each situation will need to be considered on its merits.As you can see this is a complicated area and you should be aware that both any mortgage company and your legal advisor are likely to need more information from you if the funds to buy your property are partly coming from a third party.  The important thing to remember is to agree terms first and then make sure any Lender is fully aware and in agreement early on. Also ensure that anyone helping you to buy the property are fully aware that they will need to provide further information and evidence of identity and funds.