Borrowing from Bank of Mum and Dad? Tell Your Solicitor
09 August 2017
If you’re borrowing money from the bank of Mum and Dad to help you buy a property, it is in your best interests to tell your Solicitor.
Your Solicitor will ask you in their initial contact how you are going to fund the property purchase, including whether you will be getting a mortgage and where your deposit funds are going to come from.
If you are paying a deposit from a bank account belonging to you, your Solicitor will need to see evidence of the source of funds. Your Solicitor needs this in order to comply with Money Laundering Regulations and also to inform your mortgage lender (if you are getting a mortgage).
If you are receiving funds from your parents, it could be argued that they own part of the property as they contributed to the purchase price. This could give your parents an ‘equitable interest’ in the property, and there have been cases where people have had to attend Court to resolve this issue. This puts the mortgage lender at risk, as ultimately it would prevent the lender from selling the property if you were to stop paying your mortgage.
To get around any potential issues like this, a mortgage lender will need to know where your deposit funds are coming from, so you’ll need to let them know if the deposit is coming from your parents. Your parents will be asked to sign a form stating that the deposit funds are an outright gift and will not result in any equitable interest in the property being purchased. If your mortgage lender cannot obtain this from your parents, the lender may refuse to give you a mortgage.
Please note: With an outright gift there is a potential Inheritance Tax issue for you and a potential Capital Gains Tax issue for your parents which your Solicitor can advise you on.
Anti-Money Laundering Concerns
Another reason your Solicitor will request the source of funds is to comply with their duty to carry out checks to prevent money laundering and terrorism. There are Money Laundering Regulations and guidelines in place that Solicitors must follow. The Regulations are designed to stop money gained through illegal means being used for a legitimate purpose. They are also designed to prevent terrorist funding and require professionals to take an interest in the source of funds and their purpose.
The Money Laundering Regulations must be adhered to, and although some of the queries may seem intrusive, they are necessary to comply with the Regulations. Your Solicitor is highly unlikely to accept a deposit in cash as there is no way of knowing how the cash was obtained. Your Solicitor will ask for evidence of your source of funds and may ask questions about this. If you refuse to answer the queries, your Solicitor may refuse to act for you.
But as long as you can provide evidence of the source of your funds, there should be no issues with your property purchase.
If you are a first time home buyer, you can learn about stamp duty, bridging finance, gazumping and much more, by reading about the property purchase journey that one of our Conveyancers went on to buy her perfect home.