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Are There Three People in Your Marriage?

Posted: 01-11-2016

Getting married and buying property together is a time where the heart rules the head. All money is spent on the big day itself, the honeymoon, deposits on a property and money for household items that were not received on the wedding list.

But in today’s society, with a house price to average earnings ratio of 6:1[1], and couples saving up for their first home, which often involves parental help, they are affectionally known as KIPPERS[2] (Kids In Parents Pockets Eroding Retirement Savings) i.e. children staying at home often well into their thirties with parents having paid for their gap years, university education, cars and deposit on first homes.

Parents these days often pay and assist with weddings, deposits on properties and home improvements, like extensions, as the family expands and grandchildren are expected. In these times money is gratefully received by the couple, and the last thing on their minds are making formal arrangements to protect these funds on the parent’s behalf.

But the couple should consider these questions: –

1. Is the money a gift or a loan? If the latter, they should encourage a written contract with specific terms i.e. names of the parties, the amount borrowed, when the money is to be repaid, whether this is by lump sum or instalments and the rate of interest due (if applicable). If investing in a property, a Declaration of Trust is strongly advised so that their parents’ interest can be protected and recovered upon a sale.

2. If the money is a gift, would the parent feel the same if the couple were to divorce? If not, the same advice above in number 1 would apply.

3. Is the money a gift from parents as part of inheritance tax planning? This normally only applies to wealthy families who can afford to gift such monies. However, if parents die within 7 years, this may be subject to inheritance tax depending on the value of their parent’s estate. Parents should seek different advice here from an Independent Financial Advisor (IFA) or a Private Client Solicitor authorised to give such tax advice. This advice will also apply to number 4 below.

4. Does the gift have a reservation of benefit? By this, do the parents expect to benefit personally from their investment, i.e. often houses are extended and parents move back with their children to assist with the grandchildren or perhaps their children to care for them to avoid care home fees. If money is invested into the property which often can involve life savings, independent advice for the parent should be sought regarding a Declaration of Trust, and the children should be open to the idea of a restriction being placed on their title deeds to ensure that their parents are not “left in the cold” upon a divorce. Alternatively, if a parent’s house is gifted to the couple whilst the parents remain living there, not only is this a risk to their future financial security but it may also be seen as gift with a reservation of benefit (GROB). This is caught by section 102 of the Finance Act 1986, which will mean that inheritance tax is charged as if the property remaining in their estate.

To conclude, couples need to consider third parties in their marriage, which is normally the parents of one of them. At a time when the couple are thinking to the future, they don’t want to consider “what if?” and normally are ambivalent to sparing a thought to the financial situation they will leave their parents in if things go wrong.

Upon divorce, parental monies are often cast aside, assumed to be gifts or “soft loans”, and are not treated in the same way as hard debts such as bank loans and credit cards that attract high interest and affect your credit rating if the parties default.

So, whilst visiting a Solicitor may not be at the forefront of the couple’s minds, it really should be high on their agenda. The cost of getting a Declaration of Trust drafted is minuscule, compared to (a) the cost of arguing the issue upon a divorce and (b) the fees their parents may incur to intervene as a third party to the couple’s divorce.

[1] The Guardian – House prices compared to earnings “close to pre-financial crisis level” – dated 27th May 2016.

[2] Term dubbed by The Prudential.