Mom and dad banks are struggling to recover loans from their children’s exes, lawyers warn

Parents who lend money to buy property may end up fighting with their children’s exes to get it back unless they put safeguards in place beforehand, lawyers warn.

Relationship breakups can lead to disputes over money given not only to buy houses but also to pay for weddings and even fertility treatments, according to a law firm.

Skyrocketing home prices have led many families to give loans or gifts to their adult children to help them access the property market, which can create problems if they have partners who contribute little or nothing to the purchase.

But you can take steps to protect your money and get it back if you separate later, which are explained below.

There are an increasing number of cases of well-meaning parents trying to recover money from a child’s ex-spouse or partner, according to solicitor Kate Booth of Brindley Twist Tafft & James.

There has been an increase of around 25 per cent in cases over the past two or three years where parents and family members have provided money to buy property, and the question of whether this should be returned after a separation is becoming contentious.

Most disputes revolve around whether the money was originally intended as a gift or a loan, Booth explains.

‘Without a formal agreement in advance it can be difficult to prove intent at the time, leaving the other party free to argue that it was a gift that does not need to be returned.

“The difficulty arises when what was an informal agreement is later viewed from a different perspective. What was not an issue in happier times can become a major issue of contention.”

Booth says there is an important legal distinction between gifts and loans, since a court will include the former in the marital estate to be distributed in a divorce, while loans are classified as a liability to be repaid.

“Loans will be deducted from total assets, resulting in less to divide,” he explains.

‘The issues can be further complicated if the courts are dealing with hard liabilities (mortgages, credit card or business loan repayments) or soft liabilities, such as loans from family and friends without formal repayment terms.

‘In such cases of soft obligations, a court may decide that there is less priority for repayment.’

Rachel Spencer Robb, family law partner at Clarion, says the “Bank of Mum and Dad” is behind almost half of first home purchases by buyers in their 20s and 30s and the average sum handed over is £25,000, according to figures from the Institute for Fiscal Studies.

“When parents give their adult children and their partners large sums of money, it can be difficult to get that money back if the relationship breaks down,” she says. “The truth is that many agreements are often informal.

‘Unless the parents have proper documentation that the money was intended to be returned, or only to go to the couple’s half, then the court is likely to rule that the amount was a gift and not a loan and therefore cannot be returned.’

Spencer Robb notes that there have been cases where a parent has clear documentation proving they made a loan and not a gift, but a court can still decide that an ex-spouse should keep the money.

‘This is because during a divorce the court must take into consideration all factors, including the divorcing spouses’ income, arrangements for children and the length of the marriage, and the needs of the parties take priority over arguments about the source of funds.’

What precautions should be taken before lending money to children?

Parents can register a lien on the property title, which clearly states that the loan must be repaid, says Kate Booth of BTTJ.

She says prenuptial and postnuptial agreements also offer very clear protection, and declarations of trust between parents and their children and/or their children’s spouses give a clear record of intentions.

Here’s Kate Booth’s checklist for what to do if you want to lend money to an adult child to buy a home with their spouse or partner.

– Receive legal advice, independent of the child and his/her spouse or partner, and tax advice as well.

– Consider whether you intend to have an interest in the property being purchased and, if so, whether you want to record a lien on it.

– If you are not recording a charge, consider entering into a declaration of trust to record your intentions at the time and make it clear that the money must be repaid.

– If you do not have any liens on the property or a declaration of trust, you can enter into a formal loan agreement that records the terms of the loan and how it is expected to be repaid.

– You may not be able to achieve this, but your child and your spouse or partner could enter into a prenuptial or postnuptial agreement if you are married, or a cohabitation agreement if you are not married, to record intentions when money is given or lent and how and when it will be repaid.

– Regardless of whether your child is married or not, it is important to have contemporary evidence that the above matters were addressed.

How do courts view loans to married and unmarried couples?

Booth says that if the issues outlined above are not addressed, then in divorce cases a court will have broader discretion to decide what should be included as part of the “pot” of marital assets.

“The court’s key role when it comes to financial issues in a divorce is to ensure that the needs of the spouses and their children can be met,” she said.

‘In divorce cases, there are increasingly arguments about whether the money was a gift or a loan and, if it was a loan, whether it was ‘hard’ or ‘soft’.’

Hard debts such as mortgages, credit cards and bank loans will be treated by the court as if they should be paid from assets, he said.

Soft debts, such as household loans, for which there are no formal repayment conditions and no or limited payments have been made, are unlikely to be enforced, he added.

In that case, a judge has the discretion to effectively ignore the loan and add it back into the assets to be shared between the spouses as if it were a gift, according to Booth.

She says that if her son is not married, a court is not open to such discretion, but in the case of a very short marriage after a long cohabitation, its discretionary powers are invoked.

Regarding unmarried couples, Booth adds: ‘The concept of “de facto marriage” is not recognised in these cases and even long-term cohabitants will generally not acquire rights against their partner when they separate.

‘The starting point in these cases is the legal ownership of the property and the owners’ intentions when acquiring it. If there is no documentary evidence of a loan, it will be very difficult for the parents to recover their money.

Obtain legal advice, especially if couples make deposits of different sizes on a joint property.

“Parents and third parties should be clear from the outset whether the amount is a loan or a gift and who the recipient will be,” says Rachel Spencer Robb of Clarion.

‘Prenuptial and postnuptial agreements are vital to ensure that no money is lost in divorce.’

She says getting legal advice is essential for couples making different sized deposits on a joint property.

‘Financial agreements are also not legally binding unless drawn up by a solicitor, so it is vital to seek out an experienced family lawyer.

‘Wills are also crucial to ensure money passes to the intended person, so parents should make this clear when dividing assets.’

Spencer Robb adds that if a parent owns a family business and intends to transfer shares to his or her children, he or she should not do so unless the child and his or her spouse have signed a nuptial agreement.

‘Failure to do so could result in a dispute over whether the business’s shares are marital.’

What happens if you give your child a loan and the relationship breaks down?

“When I’m acting on behalf of a person whose family has advanced money and insists it must be repaid, I will look for evidence to support that it was a loan,” says Kate Booth of BTTJ.

Is there a written agreement? Were there emails? Have payments been made? Very often we find that there may have been very large payments made shortly before proceedings were started.

In such cases, we will review bank statements, ask questions about such payments and request further evidence.

Booth notes that where there have been refunds over a long period of time, this suggests that everyone agreed the money should be returned.

But she says if there is a sudden payment close to the time of a separation and court proceedings, this is more suspicious and could suggest one spouse is trying to diminish marital assets.

Kate Booth says she will consider the following questions as she gathers evidence.

– Has the father registered any liens on the property?

– Was there a declaration of trust?

– Is there evidence that either party received legal advice at the time the money was provided?

– Does the transfer of ownership record at the time of purchase make any reference to funds provided by the father?

– Is there a formal loan agreement?

– Is there documentary evidence of how the father expected the money to be returned to him?

– Are there contemporaneous documents, emails and text messages that provide evidence of the parties’ intentions?

– Have the child and his/her partner made any payments?

– Would it be likely that the father would sue the child to demand payment?

– How much did the father provide to the son, both in the context of the marital assets and the parents’ own assets?