Bishop & Sewell
Flower

With property prices ever on the increase, the only way that some young first-time buyers may be able to get onto the housing ladder is with a substantial gift from their parents.  While you may be happy to help your children financially, you may have concerns as to whether that gift could be attacked by your child’s spouse or partner in the event of a relationship breakdown.

The Family court in England has a very wide power to redistribute assets on divorce and any parent making a large gift to a child needs to look at how best to make sure that their gift does not fall into the hands of their child’s spouse or partner in the event of a relationship breakdown.  We look at some of the options.

A documented loan

Rather than making a gift, an option is to record the payment as a loan and possibly registering it as a charge against the property.  This means that the payment is not a gift and the money remains an asset of a parent making the gift.  The loan then forms part of the lender’s estate on their death and is subject to inheritance tax.  A gift does not attract inheritance tax so long as the maker of the gift lives for seven years from when the gift was made. There is always the option to write off the loan in later life, although the loan will become a gift from which is treated as having been made on the date it is written off and the seven year period for inheritance tax then starts.

Even if a loan is documented, the Family court may regard a loan from a parent as ‘soft’ meaning that it is one that they do not consider is one that will be called in.  This will depend on the individual circumstances of the case, so it is best if a loan is formally documented.  For parents who may need a loan repaid, e.g. as they will need the money in their retirement, then the court is far more likely to regard it as ‘hard’, rather than a payment from very wealthy parents.

A pre or postnuptial agreement

The broad principle on divorce is that ‘marital’ assets should be divided equally whereas ‘non-marital’ assets should be retained by the person whose assets they are.  Non-marital assets are defined as assets brought into the marriage or acquired during the marriage by way of inheritance, gift or trust distribution.  However, while a family home may have been bought using non-marital assets or bought using a gift from parents, a family home is regarded by the court as being a marital asset, whatever the source of money to purchase it.  In order to protect a parental gift, a pre or postnuptial agreement should be entered into.

While pre and postnups are not legally binding contracts under English law, the terms will be very likely to be upheld by the court so long as certain criteria are met including obtaining independent legal advice, giving financial disclosure and the agreement not producing an outcome which is manifestly unfair.

It is quite common for parents entering their later years to want to make substantial gifts to children as part of their inheritance tax planning.  Anyone considering this should ask their child to enter into a postnup before the gift is made or, at the very least, tell their child to make sure that the gift is not used to buy a family home or intermingled with their spouse’s assets.

Unmarried partners

For parents whose children are living with a partner, but who are not married, they should ask that any property purchase is either in their child’s sole name if they are contributing the entirety of the purchase price or as tenants in common in specified shares with a deed of trust if they are contributing unequal amounts.  This will ensure that if the relationship breaks down their gift to their child is kept by their child.  A cohabitation contract will lessen the possibility of a dispute if the relationship breaks down.

If, having purchased and a property and living together, a child then gets engaged, they should be strongly encouraged to enter into a prenuptial agreement.

In cases where very substantial gifts are contemplated one can look at more complex structures. Such structures will incur costs in setting up and then administering, together with potential tax consequences having to be considered.

Every family situation is different and professional advice should be taken as which options may be best will vary depending on individual circumstances.

Our Family lawyers have the knowledge and experience to guide you through these challenging times. If you are affected by similar issues or would like to have a related discussion in confidence, please call me Philip Rutter on 020 7079 2406 or email prutter@bishopandsewell.co.uk

The above is accurate as at 14 September 2021. The information above may be subject to change during these ever-changing times.

The content of this note should not be considered legal advice and each matter should be considered on a case-by-case basis.


Category: Blog | Date: 7th Sep 2021


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