27th Apr 2020

The Bank of Mum and Dad

By James Pirrie

In this blog, Family Law in Partnership director James Pirrie discusses what impact giving financial assistance to your children can have on divorce.

A short while ago Annie Ward of Pump Court Chambers reported in her presentation about the related litigation that £6.3 billion had been loaned by parents towards their children’s property purchases. This means that one in five of all properties had been funded or part funded in this way.  It is an astounding total.

The storm of the Coronavirus pandemic is likely only to have increased the amount of financial ‘helping out’ being provided.  I say “loaned” and that of course will often become the million – or £6.3 billion question if the child is in a relationship and that relationship ends: 

Was this payment:

  • A loan? 
  • A part purchase of a property involved?
  • Or a gift?

Clarity will be needed between the three options to answer the question, if there is a divorce what happens now?

  • If it was a loan:

a) then what were the terms on which it would be repaid?

b) Is interest due?

c) And if so by whom?  Child or the spouse too?

  • If the money was the parent buying a share in the property then three or more people own it – but in what shares and can the parents call for a sale?
  • If the sum was a gift, it may make little difference whether it was to the child or to both the child and spouse because in most situations of pinched resources, the court may seek to leap upon the sum to try to create viable futures for the two separating parts of the family, often heedless of where the money actually came from.

The legal case

At the point of a divorce, in many situations, a tight alliance will form between child and parents, often a united front against the other spouse.  And so may begin the struggle by parents, child and spouse to gather their evidence to back their assertions, involving:

  • All the emails and texts at the time;
  • Perhaps wills or testamentary arrangements or instructions to financial planners;
  • Reports to tax authorities etc

But always the confident assertion of half remembered contemporaneous conversations.

These are difficult cases where emotions will run high and the litigation will have unexpected twists and turns, with the only certainty being large legal bills along the way.  Points that may come into the reckoning will include:

It must have been … … because
A gift the commercial mortgage at the time imposed the condition that no other loans be taken out


It wasn’t reported as an asset to [the nursing home]  [the financial planner] etc


the parents made a compensatory gift to other siblings in their Will


the parents always documented their formal loans and here there was no documentation     … etc

A loan Because the parents made no compensatory payment to the child’s siblings in the Will


Because it would have been reportable as above the nil rate band


Very often we see confused presentations being made by the family members, because whilst the three options are mutually exclusive, the family members will often make assertions crossing between the boundaries of each:

  • It wasn’t a loan … it was a part purchase and now interest is due [ ? ]
  • It was a part purchase but no additional rate stamp duty was paid [ ? ]
  • It wasn’t a gift but there is no evidence of it as an asset in the parents’ estates.

How the problem often arises:

This is often more about lack of clarity not mendacity. It is about trying to make sense of something that was not thought through at the time: the child had hopes; the parent(s) had money and a willingness to help. What could be simpler or more obvious! It is only when the stress of an unforeseen development comes along that the muddle and difficulty breaks out and everyone starts to try to rationalise it.

It will often only feel fair that this largesse from the child’s side of the family is recognised and the spouse isn’t permitted to raid resources that they would never have been intended to share in, had the possibility of separation been discussed at the time. On the other side, the spouse may often honestly have believed that they had a measure of financial security which the wealthy child and parents are now seeking to strip away.

Often the original arrangement will have been vague for a reason … the parents may have had at the back of their minds reducing exposure to IHT or claims in relation to nursing home fees but may also have wanted a measure of control. They will have assumed that the exact status of the arrangement could be clarified at a later date. However, the point of separation where the benefits of the different approaches are so stark for the different players is never going to be a good time to be working out the details

And of course even if the money does ‘result back’ to the parents the court may still want to find an answer to the questions

  • if it hasn’t been asked for before then why would it be demanded back now at a time of maximum financial stress?
  • might it yet be advanced back to the child to help with their new purchase meaning that more of the money could go to the spouse to similarly put the spouse on their feet too.

 Avoiding the problem:

Sorry but it is usually going to be down to Mum and Dad to do the grown up thing and take the lead on documenting the arrangement. The child is usually too excited about making the purchase work to be in any sort of state to think any distance down the track.

If it is a loan then:

  • Check the mortgage paperwork as to whether this is permitted.
  • Remember that the loan is an asset on which IHT will ultimately be paid by your estate and which may be called in by your creditors in the meantime.
    • You can “forgive” the loan before then but that will require a specific act;
    • CGT would probably still be due; and
    • It could be set aside if it was done at a time of your own financial stress and creditors were prejudiced.
  • You need to specify the terms (write them down and all sign up … ideally get this done professionally):
    • When repayment can be demanded by you;
    • Whether interest is due – when it will be paid (and of course income tax will be due on it).
  • If you make further loans then be clear about the basis on which you are doing so and whether these are a) gifts or b) loans and if loans then whether on similar or new terms.

If it is a part-purchase:

  • Then always enter into a proper agreement setting out your relative rights in the property and clarifying:
    • Entitlements as to occupation
    • Duties as to payment of mortgage and other outgoings and repair etc
    • The circumstances of sale and how precisely the shares will be calculated (have in mind the complexity that will arise as values may rise or fall and how any mortgage will impact upon those changing numbers).
  • Make sure that your interests are registered for all to see at the land registry (and of course ensure that the arrangement is approved by the mortgagee – and you will usually need to be party to the mortgage too).
  • Remember you will probably have penalty stamp duty to pay – take advice on this too.
  • You will be liable for CGT on any gain when the property sells

In the above two cases, always make sure that any new partner of your child is aware of the situation if the relationship becomes a serious cohabitation one or your child marries, you are always heading for difficulties if the partner does not know of your financial claims.  And really you need to be able to prove that they know too – without that written evidence, sorting out finances at separation is always going to be harder.

In the case of a gift:

  • Make a report to HMRC if your gift is above the IHT nil rate band of £325,000.
  • Consider taking out insurance for additional IHT for which you may be liable for the following seven years.
  • If you are not happy to see the fund being in effect shared with a new partner then a pre or pot nuptial agreement dealing with the entire financial arrangements is going to be needed.
    • You should insist on this at the time of the loan; or
    • Obtain your child’s agreement in writing to enter such an agreement if a relationship develops later on.
  • There are also risks in relation to cohabitation (and very clear risks if children are born).  Again you may want to make entering a cohabitation agreement a pre-condition.

The costs of these steps will be dwarfed by the stress and cost of having to resolve the situation if things become difficult for you. So always please think about documenting clearly what you are trying to do (having thought through clearly what is to be done for the best) – and anticipating all the things that might go wrong.

We are happy to help or direct you towards other professionals who will be able to make a start and discuss the options.

James Pirrie is a director at Family Law in Partnership. James specialises in complex financial issues and non-adversarial and cost-effective approaches to divorce and separation including mediation, arbitration and collaborative law. He helps clients take control of the issues that affect them, clarifying priorities, exploring all the options and identifying the best way forward. Contact James at E: jp@flip.co.uk or T: 020 7420 5000