How to protect the "bank of mum and dad" when your child is cohabitating

Q&A: I have recently provided my daughter with funds to buy a flat in her own name and she wants her boyfriend to move in. Could he have a legal or financial claim on the property if they split?

Unmarried, cohabiting couples are the fastest-growing type of family, with an increase of over 25% in a decade.

As house prices continue to rise faster than average incomes, many young people are turning to the “bank of mum and dad” to help with their first property purchase.

Whilst such scenarios are increasingly common, they give rise to a number of legal issues.

Funding a purchase for a family member

It is important to think carefully about the help you are agreeing to provide, and to be clear with your daughter about the terms on which you are providing it.

Will you be lending the funds, or making a gift? There can be tax advantages to making gifts during your lifetime but a gift is irrevocable, and you should only make a gift if you can truly spare the money. You also need to bear in mind that, once you have made a gift, you have very little control over what the recipient does with it.

A loan does not have the same tax advantages of a gift, but it can provider greater flexibility. It is important to be clear about the terms of any loan – what it is to be used for, when it is to be repaid, and whether interest will be charged.

You also need to bear in mind that a court may look behind the loan documents when deciding whether there is a true expectation that a loan will be repaid. There are many cases where courts have decided that a loan between family members is “soft” and that the lender will not in reality insist on repayment.

A properly drafted loan agreement, clearly setting out the terms of the loan, is essential. If the loan is to assist with a property purchase, you should consider registering a charge against the property, in the same way a bank or building society would, so that you are notified if the property is sold or another loan is secured against it.

Finally, you need to think about who you are making the loan or gift to. If your daughter and her boyfriend were purchasing the flat in joint names, for instance, you should be very clear that you are making the loan or gift to your daughter, not to the two of them jointly, and you should insist that is reflected in the ownership of the property.

Cohabitation agreement

Ordinarily, your daughter’s boyfriend cannot acquire an interest in her property simply by living in it. However, in reality, it is all too easy for situations to arise whereby he does acquire an interest.

For instance, if the boyfriend received an inheritance, which he used to fund an extension to the property, he could potentially claim that a “resulting trust” had arisen, whereby he acquired an interest to the value of the contribution he made, and any increase in value attributable to that contribution.

Or consider a situation where your daughter and her boyfriend decide to start a family. The boyfriend is in a less well paid job and offers to give it up and become a stay at home father, but he expresses concern that doing so would leave him economically vulnerable if they split up. To reassure him, your daughter promises that “what is hers is his” and that he will always be entitled to half the sale proceeds if they split up. In such a case, there is a real risk the court would decide that a “proprietary estoppel” had arisen, and that your daughter should be held to her promise, because the boyfriend had relied on it to his detriment.

Both those scenarios, and many others, can be avoided if your daughter enters into a cohabitation agreement with her boyfriend. Such an agreement can record the exact terms on which they own and occupy the property and can deal with issues such as:

• If the boyfriend is paying rent or a contribution towards outgoings
• Whether they expect he will acquire a right to occupy the property, or an interest in it
• Who will pay the bills
• What will happen if your daughter asks him to move out
• Whether furniture will be jointly owned or earmarked as owned by one or other of them.

Marriage

Finally, if your daughter and her boyfriend decide to marry in the future, then the situation changes dramatically. Spouses can make financial claims against one another on divorce, irrespective of how property is owned, and the divorce court can order transfer or sale of property as it sees fit to ensure the parties needs, and those of any children, are met. Where one party has acquired assets before the marriage, or expects to inherit assets during the marriage, they are strongly advised to insist on a prenuptial agreement.

Simon Blain is a Partner in the Family team and Helen Marsh is a Partner in the Residential Property team.

The Life Cycle of Family Wealth

From growing a business to starting a family or handing over control of that business to the next generation, every individual has their own goals to aspire to. Our Private Wealth lawyers advise our clients throughout this family life cycle, providing the legal advice required for specific transactions such as purchasing a home or selling a business, whilst also advising on the long-term opportunities for succession and estate planning.