Tax and estate planningProperty and mortgages

How Parents of Cohabitees Can Protect their Property Interest

There are no excuses for not keeping up to date these days, as our smart phones are always serving up the latest breaking news and the views tailored to our tastes with their complex and laser-sharp algorithms. In fact, it can be easy to be numbed to developing events under the constant bombardment, as we become accustomed to the production line of packaged news. However, I did have my head turned by an interesting case reported in the legal press recently about a co-habiting couple splitting up, and the subsequent claim over the property they used to live in.

When they separated, the outcome of the case was that the man was granted a 50% interest in a London house that was in his former girlfriend’s sole name. When the couple were together, the man had given her £20,000 towards the purchase price of the property, while she had contributed £45,000. He had also paid half of the monthly mortgage payments and the renovation and upkeep costs on the property until the couple broke up, but the mortgage remained in her name alone. The reason the case grabbed my attention and managed to pierce through the noise of all the news of a normal day is because, at Progeny Private Law, this is an area we’ve been increasingly advising our clients on in recent years.

The Risks

As house price increases continue to outstrip average income rises, the aspirations of the younger generation for even getting onto, never mind up, the ladder are becoming less and less certain to be realised.

It is quite common for parents to want to give their offspring a financial leg-up the property ladder. It’s the story of our times: the comparatively wealthy Babyboomers whose lives straddled the sweet spot between post-War and pre-austerity are oft-cited as the generational glue holding our society together. As house price increases continue to outstrip average income rises, the aspirations of the younger generation for even getting onto, never mind up, the ladder are becoming less and less certain to be realised. Hence the entrance of Mum and Dad into the equation.

What we have found recently, amongst our clients who are parents in this situation, is that they are also seeking some protection for the funds. As the outcomes of the case highlighted above show us, there can be risks to just gifting money outright to their offspring in this situation, even when they are only cohabiting and not married. Many parents are mindful that their son or daughter is about to set up home with a boyfriend or girlfriend and they want to make sure that their child’s interests in the property are properly and correctly protected.

The Implications

The implications of the recent case are, for example, if a woman buys a house and her boyfriend moves in with her and helps her to pay the mortgage and the maintenance on the property and then they split up, then the boyfriend will have a claim on the equity in the property. It may not be 50% as was the case in our example above – it would depend on the amount he has been paying – however he has a claim on the equity nonetheless. In this situation, when the couple separate, the court would say that the woman has to buy out the boyfriend or, in a worst-case scenario, the court could force the sale of the property in order for him to get what he’s due.

The Solutions

At Progeny Private Law this is a situation that we had already foreseen, and we have been advising our clients accordingly. The case’s appearance in the news gives me a chance to reiterate the advice we have been giving our clients and to outline the options that exist to deal with the problem to anyone in a similar situation. There are three particular pieces of action that the parents could undertake to protect their money in any cohabitation situation.

  • Trust – The first option is setting up a trust and loaning the money to their son or daughter through the trust structure. This can be a doubly beneficial course of action for the parents. Firstly, because as the funds are held in a trust they exist outside the parents’ estate for inheritance tax purposes and, secondly, because if the relationship fails and the couple split up, it allows for the trust to call in the loan. In this scenario, as an example, if the property is worth £600k and the parents contribute £500k towards it through a trust and the boyfriend pays half of the remaining mortgage and any renovation costs, then his claim over the equity in the property should only be on half of the excess over the £500k (£100k), rather than on the £600k.
  • Loan – A second option is a loan. The parents could loan the requisite sum to their son or daughter under a formal loan agreement. This would mean that they would still retain control of these funds.
  • Agreement – A further option to be considered is for the couple to speak to a solicitor to draw up a cohabitation agreement between them, which sets out the terms of their entering into the property purchase together. This can clearly state each of their contributions towards the purchase price and define how these would correspond to their claims on the equity in the event that their relationship fails later down the line.

Additional Considerations

With the use of a trust in this situation, and loaning money from it, it’s also important to remember that this will need to be harmonious with your Will. My colleague Ewan recently penned a piece on setting up a trust as part of your Will and the fact is that your Will will also need to have a trust structure in place as this will ensure that the funds are protected in life and on death.

Although this case refers to cohabitating couples, it serves as a useful reminder that the implications are the same for parents of married couples who are making a financial contribution to enable their son or daughter to get on the property ladder. It is equally important to protect the financial interest in this instance also.

Planning Ahead

The thinking about all the implications of cohabiting and buying a property together is better done earlier rather than later to make sure that all eventualities have been anticipated.

A final point to add is that if you are considering making a contribution to your son or daughter’s property purchasing fund then it’s best to plan for this as far ahead as possible. For example, in recent years it has become increasing difficult for buyers to secure a mortgage when there is a trust in place loaning part of the money to purchase the property. Advice from a mortgage broker in the preparatory stages can help navigate this terrain.

The thinking about all the implications of cohabiting and buying a property together is better done earlier rather than later to make sure that all eventualities have been anticipated. Our colleagues at Progeny Wealth can help you to create a long-term financial plan which considers all of your life aspirations and can help you to plan effectively in advance for goals such as this. Combining a financial plan with advice from us at Progeny Private Law which takes into account all relevant legal considerations will provide you with the right support for whatever situation you are in.

The unique, joined-up, multidisciplinary nature of Progeny can ensure you have the right plan in place to deal with any eventuality and that your interests and equity are protected whatever the future brings.

If you are in the above circumstances and would like some advice and support, please get in touch.

The content of this article is for information only and is not intended to be construed as legal advice and should not be treated as a substitute for specific advice. Progeny Private Law Ltd accepts no responsibility for the content of any third-party website to which this article refers.

Suzannah Farnell

Associate Director, Private Law

Suzannah specialises in providing complex inheritance tax and succession planning advice for wealthy individuals.

Learn more about Suzannah Farnell

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