The Vital Role of the ‘Bank of Mum and Dad’: Navigating Financial Support, Legalities, and Future Disputes

The Bank of Mum and Dad (BOMAD) is recognised as the 9th biggest provider of finance for property in the UK. A report by Legal & General in September 2023 emphasised the importance of guiding BOMAD lenders properly to prevent financial difficulties and ensure efficient support delivery.

Family law issues

Case of P v Q

In the 2022 case of P v Q, the court examined whether money advanced by both parties’ parents was a loan or a gift and, therefore, how it should be considered in the context of their divorce financial settlement:

• The wife’s father advanced €30,000 in 2004 for her studies.
• The husband’s mother advanced £150,000 in 2010 from her business sale.

In 2020, after separation, the husband repaid £150,000 to his mother, claiming it was a loan repayment. This led to disputes over whether this amount should be included in the asset schedule for distribution. The court found both sums to be soft loans. The wife’s €30,000 loan was ignored, and the husband’s £150,000 was added back to the “pot” available for distribution. The court’s decision centred around the lack of clear agreements and the expectation of repayment.

Key takeaways include the importance of clear documentation, such as formal, signed loan agreements detailing repayment terms and interest, when parents or other family members provide financial support. Courts will examine whether there was a genuine expectation of repayment, making clear communication and record-keeping regarding the loan crucial. 

To avoid complications, consider the following steps:

1. Pre- or Postnuptial Agreements: Provided certain safeguards have been met, and it would not be unfair to hold either party to the terms, these agreements will largely be upheld by the Family court.  They are therefore a useful tool in overcoming issues involving familial financial support.
2. Cohabitation Agreements: For unmarried couples, these agreements - coupled with declarations of trust - provide contractual certainty about financial arrangements and are legally binding. 

Estate planning issues

The issues in relation BOMAD and estate planning tend to focus on whether things are classed as gifts or loans.

Gifts can be useful for Inheritance Tax (IHT) planning. They can utilise annual allowances and, if the donor survives seven years, can pass free of IHT. 

If gifting is being considered clients need to understand that they cannot keep any benefit in the gift and they will have no right to ask for any of that gift back.

Clients should ensure they can afford to make the gift and understand any tax implications of doing so, such as Capital Gains Tax and Stamp Duty Land Tax. 

Evidence and documentation is important, not just to show intention but also for reporting to HMRC if the donor dies within seven years.

Loans are often considered ‘safer’ as they can be called in upon events like divorce. However, loans remain part of the estate for IHT purposes. Clear terms for repayment and interest are necessary, and both parties should seek independent advice. Misrepresenting a loan as a gift to mortgage lenders can lead to legal issues. 

Loans can be converted into gifts over time for IHT planning.

Trusts can be an alternative when loans and gifts are unsuitable. They offer flexibility and control but come with tax and administrative responsibilities. Trusts may incur charges and require registration and tax returns and therefore may not be suitable for everyone.

Understanding Portions

A ‘portion’ is generally understood as a gift intended to set up a child in life or make substantial provision for them. This concept was discussed in Re Cameron [1999], where Lindsay J defined it as such. In Race v Race [2002], a portion was described as an acceleration of the bequest contained in the will. Similarly, in Kloosman v Aylen & Ors [2013], it was assumed that a parent intends to give a portion to each child only once.

If a parent leaves a substantial share of their estate to their children in their will and later gives a large inter vivos gift to one of those children, it is presumed, unless proven otherwise, that the gift is meant to substitute the bequest.

Double portions

The rule against double portions applies when a parent or someone acting in loco parentis gives a lifetime gift to a child. The court presumes that the parent has decided what each child’s portion of their estate should be and if the parent gives a portion during their lifetime, it is assumed to be in anticipation of the legacy in their Will.

Double portions become an issue when lifetime gifts are equal to or larger than the testamentary gift, leading to ademption of the whole legacy. If the lifetime gift is smaller, ademption applies to the value of the gift. This rule can apply to real property and non-residuary legacies and is only in favour of the donor’s children, not other relatives or strangers.

When gifts are not of the same category, the court will look at the facts and decide if there has been a portion. For instance, there have been cases where a cash legacy is not replaced by a gift of land unless the land’s value is specified. A house gift can replace a cash gift if the money was used to buy a house. Stock and bonds can replace a cash legacy, and farm stock can replace a share in the estate.

Resolving disputes involving double portions involves assessing the donor’s intention. The key questions are whether the gift was given as a portion and whether it was intended to satisfy the legacy. Evidence of intention can include the testator’s words, written or recorded, the date and circumstances of the gift, and the court can look at any future codicils addressing the portion. Counter evidence can also be presented by the other side.  If the parties cannot agree, the court can be asked to make a decision on whether a portion has been given.

Summary

Expert guidance and clear documentation are vital to ensure that BOMAD support is effective and avoids future disputes. Seeking professional advice is essential to navigate these complexities and ensure the best outcomes for all parties involved.

If you would like any further information, please contact Phillip Rhodes (Family), Christine Thornley (Estate Planning), and Stephanie Kerr (Wills, Trusts & Estates Disputes).