Advancing money to your children to help with a property purchase or to help them pay legal fees can open you up to unforeseen risks. This article will explore some of the regular scenarios we encounter in our day-to-day work.
Many parents have helped their children fund a property purchase or renovation work without understanding the consequences of this in the event their child’s marriage later breaks down.
On divorce the starting point is an equal division of the capital built up during the course of the marriage. The Court will draw a distinction between “matrimonial” and “non-matrimonial property”:
- Matrimonial property – is assets built up by the couple’s effort during the marriage and therefore shareable. This includes savings and property purchases, regardless of who earned the money to fund them. The family home is regarded as a shareable matrimonial asset regardless of who paid for it.
So let’s say Jane and John are separating – their family home is a property that was owned by Jane before the relationship which her parents helped her buy. Throughout the marriage Jane received gifts from her parents to help pay down the mortgage. Jane might think she should be entitled to retain the property or at least not share the equity that was funded by her before the marriage or by her parents’ gifts with John. However, those contributions will have very limited relevance to the division of assets unless there are sufficient wider family assets to divide so that both Jane and John’s housing needs can be met.
- Non-matrimonial property – is assets that existed before the couple lived together, earned by one of them after separation or gifts or inheritance which are nothing to do with the effort of the couple and have been kept separate from other family assets. These assets are only shared to the extent required to meet the spouse’s needs on divorce.
Such parental gifts would need to be protected by your child entering into a pre- or post-nuptial agreement to ring-fence the gifts from the assets to be shared in the event of a future divorce. Whilst not 100% binding on a court they are very persuasive and are the best protection available.
If the money is provided purely to help your child rather than as part of your wider inheritance tax planning, you should consider if a formal loan is a better option so that you have a legal charge (like a mortgage) registered against your child’s home to ensure it is not included in the marital assets if they divorce. This does not mean interest has to be charged to your child on the loan.
Even if the funds have already been provided, it is not too late to ask your child and their spouse to sign a pre- / post-nup (which are increasingly common) or sort out a legal charge.
Helping with legal fees
Naturally, parents will want to help their child financially through a divorce to ensure they are properly advised and achieve a fair settlement. Lending money to pay legal fees comes with risks too, as there may be a dispute about whether such a parental loan has to be repaid and the Court may draw a distinction between “hard debts” (commercial debts) and “soft debts” (informal loans from parents who would not sue their child to recover the money and it would not damage their credit rating if the debt was not repaid).
The Court will have regard to the debt but may not factor it in fully when considering an overall division. If repaying the parental loan would mean there was not enough to enable both parties to rehouse securely, the Court may divide the capital to ensure both can rehouse assuming the spouse who borrowed from his/her parents does not need to repay the loan straight away.
In certain circumstances litigation loans can be obtained, which are loan facilities to be used to fund legal fees without any monthly repayment, where interest rolls up and the full loan and interest on it is repaid from the sale proceeds of property as part of the divorce settlement. These are hard commercial debts, which are always factored into the calculation of the pot of assets available for division between the couple. Litigation loan companies will sometimes also lend money to fund living costs during a divorce process, which can be used to repay parents – enabling the divorcee to convert a soft debt into a hard debt.
If you are supporting your child financially or are going through a divorce and borrowing from your parents, please feel free to contact our Family Finance Team.