Parents at all times have assisted their children to become established in life but in more recent times the amount of financial assistance being given by parents to their children to enter into the property market, has been significant.
Parents assist their children and do not usually give much thought to the legal implications of their assistance which is usually a gift of money. However when money is gifted to a child it becomes their money and so it is exposed to being lost if:
- That child divorces and which in the modern world is common;
- The child dies and their estate (wealth) is inherited by people other than the parents;
- The child has considerable debts and so creditors may be able to obtain the money.
We would advise parents to consider protecting their financial assistance to their children by lending the money to the children. The aim of the loan is to protect the child particularly in circumstances where the child goes through a divorce. However to adequately protect the loan (parental assistance):
- The loan must be properly documented so that it is clearly stated that the financial assistance is a loan which is intended to be repaid; and
- Ensure that the loan is not repayable on demand because in those circumstances, there is a limitation period of 6 years from the date the loan has been made and if no demand for repayment of the loan has been taken within those 6 years, the loan becomes statute barred which means that you lose the right to sue to recover the loan and so the loan documentation is unenforceable.
What we would advise is that:-
- The loan documentation should be in a Deed as distinct from an agreement, because the limitation period in a Deed is 11 years rather than the usual 6 year period; and
- The loan should be stated to be repayable upon the happening of a specified event such as “the expiration of 5 months written notice”. If this was used, then the limitation period does not commence to run until the written notice is given and the notice period has expired; and
- A date of repayment could be specified in the loan documentation either by noting a repayment date such as 1 July 2028 or by specifying that the loan is due for repayment after a specific time, such as 10 years after the date of the loan documentation; and
- If the child is agreeable, obtain security in respect of the loan. This could be by way of an unregistered mortgage which would allow you to register a caveat on a property owned by the child or even a charging provision in the Deed.