Warning – Bank of Mum & Dad

The question to ask is whether the gift or loan from Bank of Mum and Dad (BoMaD) would take place if there was a possibility of those funds potentially going to a third party. Whilst 59% are happy to gift funds, this leaves 41% who may seek recovery.

Legal & General published a report estimating that the BoMaD had provided approximately £6.3 billion in funding in 2019.  Such sum would warrant 11^th place upon the list of mortgage lenders. Given the amounts being loaned or gifted you would consider it important that BoMaD would ensure appropriate documentation was in place to protect such sums.

The evidence is that the majority do not and as such the courts are seeing more cases where parents are being involved in family cases or claims against estates as highlighted in the recent Court of Appeal case of Farrell v Burden.

This case should be a warning to all of those parents thinking of loaning funds to children in order to buy a property.  Mrs Farrell had given evidence that she had loaned her son a sum of money in 2005 in order for him to buy a property.  Mr Farrell’s wife, Ms Burden, acknowledged that the payment had been made by her mother in law but that such funds had been provided by way of a gift as opposed to a loan. No documentation supporting either position was produced.

The dispute therefore arose upon Mr Farrell’s death in 2016.  Mr Farrell had completed a Will which provided for his Estate to pass primarily to his wife but also his children from a previous relationship.  There was no provision made to repay any debt to his mother and as such she brought a claim against his estate.

The judge at the first hearing in June 2019 found that Mrs Farrell had not proved that any sum was outstanding and even if there was a sum outstanding, then he considered that the payment made by Mrs Farrell had been a gift.  As Mrs Farrell had not proved her case the judge ordered that Mrs Farrell also meet the costs of the estate which were said to be in the region of £100,000.

Mrs Farrell, not satisfied by the decision of the County Court, sought to appeal the decision and in December 2019 the Court of Appeal considered the matter further and upheld the original decision on the basis that there was a lack of evidence that the sum was intended to be a loan as opposed to a gift.  Clearly without any documentary evidence of intention, Mrs Farrell failed to establish her claim.

Whilst this claim was against an estate, as a family lawyer, I am seeing more and more of these issues arise in the Family Court where BoMaD have loaned money or gifted money to a child to buy a property. The basis of loan or gift has not been discussed at great length, and certainly not documented, with all parties concerned and so unfortunately upon subsequent relationship breakdowns, BoMaD often with support of child will be seeking to establish that the amount paid was definitely a loan that needed to be repaid to preserve the family asset as opposed to it being gifted.

This can be particularly important where funds are transferred later in life, sometimes as part of inheritance tax planning but can often be from equity release loans, as BoMaD utilise life savings to help their children. It is then particularly heart breaking for them when such funds could pass to third parties as opposed to passing down blood lines which is usually the intention.

Whilst there may be a cost involved in formally documenting the payments, this would often pale into insignificance compared to the litigation costs to attempt to recover the amount as Mrs Farrell has discovered to her cost.

Whilst conveyancers will carry out some due diligence as to the origin of funds, this may not go back far enough where the payment has been made in contemplation of the purchase or transaction so the funds already sit in child’s account ready to go and therefore discussions about declarations of trust can sometimes be omitted.

IFA’s should ensure that their clients are aware of the same and insist upon BoMaD getting legal advice and perhaps suggesting that any funds provided may be conditional upon the completion of a pre or post nuptial agreement or co-habitation agreement so as to avoid the consequences similar to those of Mrs Farrell.