Home loans causing family rifts

The "Bank of Mum and Dad" is currently Britain's tenth biggest lender with loans totalling £6.3bn, according to an article in The Times this week. The majority of these loans are to enable their offspring to gain a valuable foot on the housing ladder, but very often the loans are based on nothing more than trust and family goodwill with nothing in writing and this is increasingly leading to fractious arguments which end up in court.

One of the biggest issues is determining whether the funds in question constitute a gift, a loan or an investment. All three options have advantages and disadvantages from a tax and legal perspective which is why professional advice is so important in these circumstances.

If the funds are treated as a gift then the donor has little recourse to them in the event that relationships break down. A loan gives greater security but means that the finds remain in the donor's estate for inheritance tax purposes and if interest is charged then there are income tax implications. Treating the funds as an investment gives some security but can have implications for capital gains tax and stamp duty land tax.

In a recent case cited in the article a couple sold their home and invested the proceeds in an new property purchased in their sons' names. They occupied the basement. When the sons decided to sell they were unable to prove that they had any interest in the property and the court awarded the house proceeds jointly to the sons. One can only imagine the emotional fallout from a case such as that.

Given the continued difficulties for young people to purchase property without assistance the "Bank of Mum and Dad" is likely to remain open for business for the foreseeable future so taking tax and legal advice on any proposed advance of funds is vital to avoid potential future conflicts.

An increasing number of parents who lent their children money to buy homes are taking them to court to get it back, The Times has learnt.”