Why The Bank Of Mum And Dad Needs Legal Advice

The number of parents and grandparents putting their hand in their pocket to support the next generation when buying a home is on the rise. Fuelled by rising property prices and deposits, families can find they’re gifting or lending significant sums. It’s vital that financial advice is sought, but many are forgoing taking legal advice.

According to research by Legal and General, the average contribution from the Bank of Mum and Dad stands at £24,100. In 2019, the value of lending from parents and grandparents added up to £6.3 billion. We’ve helped clients understand how they can support aspiring homeowners, what taking a lump sum from their estate means in the long term, and the best assets to use.

However, clients still need legal advice, whether they’re choosing to gift or lend the money. Despite the risks and sizeable sums involved, it’s something many clients are overlooking.

The necessity of legal advice is often overlooked because loved ones are involved. Parents and grandparents may feel it’s simply unnecessary because they trust who they’ll be giving the money to or feel uncomfortable bringing it up. In fact, just 15% of loans or gifts from the Bank of Mum and Dad had a formal agreement in place, research from the Post Office found. Yet, despite the relaxed attitude, 58% of gifts made came with some conditions.

When clients approach us for advice when they’re considering lending, it’s often because they want to understand if they have enough to offer support, giving them the confidence to move forward with plans. But we recognise the importance of legal advice and the confidence it can bring too.

Legal advice for Bank of Mum and Dad loans

Where parents or grandparents have spare money now but need it later in life, to fund retirement, for instance, loans are a popular option. However, research indicates that many aren’t taking the time to have it formalised or even discuss when the money would be paid back.

Only 16% of parents and their children formalised their loan agreement using a third party. Even more worryingly, just one in five buyers borrowing the money agree on a repayment plan. It’s an oversight that could mean the two parties have different expectations and potentially leave the partners struggling financially in their later years.

Legal advice when drawing up a loan agreement can provide confidence and certainty to all parties.

It may be that you raise points they’ve overlooked when discussing the loan, such as whether any interest will be paid on the amount borrowed and how it will be repaid, for instance, through regular repayments or when the property is sold.

Clients are also unlikely to have thought about what would happen if things don’t go to plan. For instance, how would the loan agreement change if:

  • One of the parties dies
  • The borrower lost their job
  • The money was loaned to a couple, and they split up

For clients considering offering a loan to support a homeownership dream, legal advice is essential.

Legal advice for Bank of Mum and Dad gifts

Where possible, we’ve found many parents and grandparents are happy to provide a lump sum as a gift to loved ones. However, while this wouldn’t have the same impact as an unpaid loan would have, we’ve found there are still three key reasons why parents may want to seek legal advice.

  1. Conditions attached to the gift: The research suggests more than half of gifts are given under some conditions. This may be stipulating that the money is used to purchase a home or that it will provide a place for them to stay at times too. Legal advice can help set out what will happen if the conditions aren’t met and ensure parents have some security if this is the case.
  2. Forgoing inheritance: In some cases, clients have chosen to gift their children or grandchildren with financial support now, with the understanding they’ll receive a smaller inheritance in the future. This has benefits for both the beneficiary and the benefactor, who gets to witness the security their wealth has provided. However, it’s essential clients update their will in line with the agreement they have made.
  3. Gifting to children and their partners: Finally, there’s been growing concern from clients who want to lend money to their children and their partner to purchase a home but are worried about what would happen if the relationship broke down. A deed of trust can provide the reassurance clients need to know their money will remain in the family, providing security for their children, even if the couple split up.

Whether the money will be a gift or loan, simply having a solicitor present to formalise the process can help make sure everyone is on the same page. If you’d like to discuss how we could work together to provide generous parents and grandparents peace of mind both financially and legally please get in touch.