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Relying on the ‘bank of mum and dad’ can be fraught with difficulty

Relying on the ‘bank of mum and dad’ for young couples getting on the property ladder could be coming to an end as a rising number of parents are now going to court to get their money back.

It is estimated there are between 12 to 15 cases every month of parents taking their adult children, or their child’s spouse, to court in order to retrieve their cash.

As a result, lawyers are also advising couples who rely on the ‘bank of mum and dad’ for financial help to make contracts with their parents when handouts are given following a divorce case in which the status of parental loans were disputed by the divorcing couple.

In a case heard at London’s Central Family Court, the judge issued advice about how different types of parental loans should be classified in an effort to help couples and parents decide whether loans should form part of any settlement, in the event of the marriage breaking up.

He sought to define the difference between ‘hard’ and ‘soft’ loans. The former tending to have conditions and carry an expectation of repayment, while soft loans are more informal.

According to research by the Legal & General and the Centre for Economics and Business Research, nearly a fifth of housing transactions in 2020 were backed by parental loans and gifts.

While these are a welcome lifeline, to avoid the kind of dispute that arose in the court case, couples aiming to get on the property ladder could help themselves maximise deposits by:

In the court case, a husband paid back a £150,000 loan that had been given to him by his mother, but the wife argued that he made the payment in an effort to remove £150,000 from their combined funds so that it did not have to be divided.

The court also heard that she had received 30,000 euros from her father which had been recorded at the time as an interest-free loan which she agreed to repay at her own discretion.

The judge decided that both handouts were at the ‘soft’ end of the scale and ordered that the husband’s repayment funds be re-credited to his side of the schedule while the wife’s debt to her father should not be included on the asset schedule.

The direction means that courts and mediators negotiating out of court settlements can better define whether a parental loan is ‘hard’ or ‘soft’.

For expert advice on related matters, contact our experts today.


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