Bank of family and friends

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What is the bank of family and friends?

The bank of family and friends is a term used to describe the financial support that parents, extended family and friends provide, especially for buying property. According to a recent report, the "bank of mum and dad" is the UK's ninth largest mortgage lender, with parents lending or gifting an average of £24,000 to their children in 2020.

The bank of family and friends is not a new phenomenon, but it has become more prevalent and significant in recent years, due to the rising house prices, the stricter mortgage criteria, and the economic uncertainty caused by the COVID-19 pandemic. Many young people rely on their parents to help them get on the property ladder, or to improve their living standards.

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What are the legal risks of the bank of family and friends?

While the bank of family and friends can be a generous and helpful source of funding, it can also create legal complications and disputes if not handled properly.

Some of the common legal issues that may arise are:

Whether the money is a loan or a gift

If it’s a loan, the terms and conditions of repayment should be clear and documented. The loan agreement should specify the amount, the interest rate, the repayment schedule, the consequences of default, and the rights and obligations of both parties. The loan agreement should also be registered with HM Revenue and Customs (HMRC) to avoid any tax issues.

If it’s a gift, the parents should be aware of the potential tax implications and the impact on their inheritance planning. The parents may have to pay inheritance tax if they die within seven years of making the gift, or if the gift exceeds the annual allowance of £3,000. The parents should also consider how the gift affects their other children or beneficiaries, and whether they need to update their will or create a letter of wishes.

Whether the money is subject to a trust or a charge

If the parents want to protect their money in case of divorce, bankruptcy, or death of their child, they may want to create a trust or a charge over the property. This means that they have a legal right to reclaim their money or a share of the property in certain circumstances. However, this may affect the mortgage eligibility and affordability of the child, and may require the consent of the child's partner or spouse.

A trust is a legal arrangement where the parents (or a third party) hold the legal title to the property on behalf of the child, who is the beneficiary of the trust. A charge is a legal interest that the parents have over the property, which gives them the right to enforce repayment or sell the property if the child defaults on the loan or the agreement. Both a trust and a charge need to be properly drafted and registered with the Land Registry to be valid and enforceable.

Whether the money affects the relationship between the child and their partner or spouse

If the parents provide financial support to their child, they may have expectations or opinions about how the child should use the money, or how the child should manage their relationship with their partner or spouse. This may cause tension or conflict between the parties, especially if the relationship breaks down. The parents may also have a claim against the child's partner or spouse if they have contributed to the purchase or improvement of the property, or if they have a beneficial interest in the property. The child and their partner or spouse should consider entering into a cohabitation agreement or a prenuptial agreement that clarifies their respective rights and responsibilities regarding the property and the money from the parents.

What are the legal implications of using the bank of family and friends?

The legal implications of using the bank of family and friends may vary depending on the nature and amount of the money, the relationship between the parties, and the jurisdiction where they live. Some of the possible legal issues are:

  • The enforceability of the loan or gift agreement in case of a dispute or default. A written agreement that clearly states the terms and conditions of the money, such as the amount, interest rate, repayment schedule, collateral, and consequences of default, can help to avoid or resolve any conflicts that may arise. A solicitor can help to draft and witness the agreement and make sure it complies with the relevant laws.
  • The registration of the loan or gift with the appropriate authorities, such as the land registry, the company registry, or the tax office. This can help to protect the rights and interests of both parties, as well as to prevent fraud, money laundering, or tax evasion. A solicitor can help to complete and file the necessary paperwork and fees.
  • The taxation of the loan or gift for both parties. Depending on the amount and purpose of the money, the lender or donor and the borrower or recipient may have to pay income tax, capital gains tax, inheritance tax, or gift tax on the money. A tax adviser can help to calculate and report the tax liability and advise on any exemptions or reliefs that may apply.

Our experience

We have a team of experienced and friendly solicitors who can advise you on the legal aspects of the bank of family and friends. We can help you to:

  • Draft a loan agreement or a deed of gift that sets out the terms and conditions of the money transfer.
  • Create a trust or a charge over the property that protects your interests and complies with the mortgage lender's requirements.
  • Negotiate and resolve any disputes or claims that may arise from the bank of mum and dad.
  • Prepare a cohabitation agreement or a prenuptial agreement that safeguards your relationship and your assets.

If you are thinking of lending or gifting money to your child, or if you are receiving money from your parents, contact us today for a free initial consultation. We will listen to your needs and provide you with practical and tailored advice.

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Our team of specialist family lawyers are here to support you if you're facing issues involving the bank of family and friends. Speak to our team today. 

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Bank of family and friends FAQs

The bank of family and friends is an informal term for the financial support that some people receive from their relatives or close friends, either as a loan or a gift. This can help them with buying a property, starting a business, paying for education, or covering other expenses.

Using the bank of family and friends can offer some advantages over traditional sources of funding, such as banks, mortgages, or credit cards. These may include:

  • Lower or no interest rates
  • More flexible repayment terms
  • Easier access to funds
  • Strengthening the relationship with the lender or donor

Using the bank of friends and family can also involve some potential pitfalls, such as:

  • Confusion or disagreement over the terms and conditions of the loan or gift
  • Resentment or guilt if the borrower or recipient fails to repay or use the money as expected
  • Damage to the relationship with the lender or donor in case of a dispute or default
  • Legal or tax implications for both parties

To avoid or minimise the risks of using the bank of family and friends, it is advisable to:

  • Have a clear and honest discussion with the lender or donor about the amount, purpose, and expectations of the money
  • Put the agreement in writing and sign it by both parties, preferably with the help of a solicitor
  • Keep records of the transactions and communications related to the money
  • Review the agreement regularly and update it if necessary
  • Seek professional advice on the legal and tax implications of the loan or gift

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