How a Deed of Trust Can Protect the Bank of Mum and Dad
07 September 2017
When buying property, lots of people now rely on money from their family members. In fact, the ‘Bank of Mum and Dad’ is now one of the largest mortgage lenders in the UK (assuming, of course, that it was a real bank).
A common situation is that parents decide to help their children get on the property ladder by gifting them a lump sum of money. This often goes towards the deposit, as lots of people find that while they’re able to get a mortgage, it would take many years to save for a deposit.
Helping with a Deposit? Things to Consider
But when parents decide to contribute in this way, they must remember that the money is being gifted to all the homebuyers. It’s necessary to think about the implications of this, as it may cause issues if their child is buying the property with someone else, such as a partner or friend.
This is because although relationships are likely to be more than amicable at the time of buying the property, circumstances may change in their future. What if the relationship breaks down? Your child may split up with their boyfriend or girlfriend, or fall out with their friend.
If this does happen, what happens to the money that has been contributed? Well, it’s tied up in the property, and unless a formal agreement has been put in place, both homeowners will benefit from the money equally. It won’t be recovered by the person whose family member made the contribution.
Deed of Trust
However, there is a way of ensuring that whatever money is gifted by a parent ‘follows’ their child, should certain circumstances arise in the future. This can be achieved by putting a Deed of Trust in place (also called a Declaration of Trust).
A Deed of Trust is a legal document that sets out how much money has been contributed towards a property purchase, and how it should be recovered in the future. This allows you to ring-fence a gift, so that if the property is ever sold or one person buys the other out, that sum of money can be returned in full.
For example, Tom and Laura buy a house together. Laura’s parents gift them £30,000 towards the deposit, and request that a Deed of Trust is put in place.
After a few years the relationship breaks down and the house is sold. The terms set out in the Deed of Trust come into force, so Laura’s parents get their £30,000, after which the equity is split evenly between Tom and Laura.
If there hadn’t been a Deed of Trust, the equity of the property would likely have been divided equally. There is no formal obligation for either person to repay the money, so Laura’s parents may never have seen their money again.
Laura could repay them from the money she has from the property sale, but this would leave her with significantly less money than Tom. This seems unfair, seeing as it was her parents who helped them get onto the property ladder in the first place.
Putting a Deed of Trust in place
Therefore a Deed of Trust can protect any money that is gifted from the Bank of Mum and Dad – or any other friend or family member, for that matter.
If you are helping a loved one buy a property, or you yourself are receiving financial help, this is something that you should seriously consider. You might think there will never come a time when the terms of the agreement are called upon. And while this is hopefully the case, you never know what the future may bring.
Without a Deed of Trust, the investment that is made could be lost, and it could end up benefitting the wrong person. And in the absence of any formal agreement, disputes could end up in Court.
Our Family Solicitors always try to avoid Court proceedings if possible, however if this is necessary in your case then we have significant experience dealing with these cases.