In the current challenging economy, the so-called Bank of Mum and Dad is becoming an increasingly important player in the UK’s mortgage market, especially when it comes to helping children with the purchase of their own homes or even investment property. However, this trend is starting to come with a catch – parents seeking a safe return on their capital are increasingly having to contend with a complex web of legal considerations.
The Rise of the Bank of Mum and Dad
The overall high cost of living—which shows no signs of easing—has necessitated the Bank of Mum and Dad, essentially parental financial support, to step in and help pick up the slack. In fact, research estimates that this ‘Bank’ provides a staggering £17bn through informal gifts and loans to their children every year. Even more remarkable is the fact that the Bank of Mum and Dad is involved in half of all housing transactions among those under 55 years of age.
But this isn’t the full story, says Charlie Davidson, a residential property expert with the prestigious London law firm, Bishop & Sewell LLP. According to him, as property costs and living expenses keep heading north, there’s a growing trend of these parents not just giving away capital—often as a form of early inheritance—but acting as bona fide lenders, expecting their children to repay the debt, sometimes even with interest.
Adopting New Roles: Parents as Creditors
Davidson elaborates, “The bank of Mum and Dad isn’t only giving away money, it’s lending it.” This paradigm shift requires them to reassess their role, he says, particularly when it comes to protecting the loan as an asset. Understandably, navigating this new role amidst the complexities of existing family dynamics can be a daunting task.
Davidson underscores that parents not just need to consider how to safeguard their capital during the loan repayment period, but also be prepared for potential liabilities. These could range from understanding the impact the loan may have on their own family businesses, to addressing their inheritance tax obligations, or even dealing with what could be an unpleasant situation in the event of a divorce (on the part of either the lending parents or the borrowing child).
Finding Your Way Through Legal Implications
This change in status from being financial helpers to creditors also means parents could inadvertently stumble on legal landmines while loaning property-related funds to family members or friends. Davidson warns, “Well-meaning parents can fall foul of some very complex rules around Regulated Mortgage Contracts, leading to enforceability issues in the courts as well as potential criminal offences under the Financial Services and Markets Act 2000.”
The implications could be particularly severe for self-employed parents or those involved in running a business. They must remain aware of the potential penalties, pitfalls and regulations they could run into if they step in to provide loans. The legal expert notes, “A fine from the Financial Conduct Authority can have serious ramifications for directors and professionals.”
In light of these risks, Davidson’s advice to the bank of Mum and Dad is unequivocal. He advocates getting professional guidance to sift through the complexities right at the onset—a cautionary note that bears heeding given the potential severity of the consequences.
His words of wisdom are, “It is always best practice to involve a specialist legal firm to advise on the structure and putting protections in place for the loan right at the point of inception, and loans involving family members are no exception.”