The Bank of Mum and Dad is now a well coined phrase. According to an article in the Telegraph on 28 August 2018 on average parents spend around £18,000 supporting children, helping them get on the property ladder, buying a new car, clearing off a debt or helping with funding for post graduate education. But according to the same article around 17% of over 55s who provide financial help to loved ones will be less financially secure, with 4% having postponed retirement and others taking funds out of pension pots, downsizing or taking out equity release. Worryingly, in the vast majority of cases the family lenders are not taking legal advice before parting with their money.
It is of course normal for families to want to help each other and most arrangements are honoured but sometimes disputes do arise. The sums involved can be small or indeed substantial but the insistence on repayment or the failure to repay can cause significant family disunity which rarely heals.
The most common issue is whether the transfer of funds is a loan or a gift. The law in Scotland is that there is a legal presumption against gift. In the absence of evidence to the contrary a transaction will be viewed as a loan and is therefore due to be repaid and with interest. If the transaction was an arm’s length transaction with a third party the assumption of the parties involved would be that the money has to be repaid.
So when there is discourse the starting point is to determine whether the transaction was a gift or a loan. If terms about the transfer of funds were made clear at the very outset then many conflicts could be avoided.
But if conditions are not transparent then problems may arise.
- It is not unusual for parents to buy their children their first homes. If the parents do not take a Standard Security over the property and the title is taken in the child’s name then the child could sell the property without repaying the parents.
- What if financial assistance is given to a happy couple to buy their new matrimonial home and the couple split up and the child- in- law wants his or her share of the equity in the property.
- There can be cash injections into businesses. Can the family member afford to pay out the money and can the recipient afford to repay the funds?
Failing to take the necessary precautions may leave a family member facing a difficult decision as to whether to write off what was intended as a loan or cause family strife.