PROPERTY // The Growing Role of the "Bank of Mum and Dad"
The current economy has been dubbed "awful" for many, with rising utility bills, interest rates, and property prices making financial stability even harder to achieve. One of the biggest challenges facing young professionals today is saving for a home—despite earning well, many still struggle to afford that all-important deposit. As a result, financial support from family members is becoming increasingly common, with not just parents but also grandparents, great-aunts, and uncles stepping in to help first-time buyers get on the property ladder. In this guide, we explore the financial, legal, and tax implications of family-funded house deposits—offering essential guidance on how to structure financial support wisely and avoid common pitfalls.
The cost of living is rising, interest rates are fluctuating, and property prices continue to climb. In this challenging financial landscape, many young professionals—despite being well-established in their careers—are struggling to save enough for major financial milestones, particularly homeownership.
Traditionally, financial support for young adults often came from parents, but today, grandparents, great-aunts, and uncles are increasingly stepping in to help. The most common form of support is assistance with house deposits for first-time buyers, reflecting a broader trend where family wealth plays a crucial role in enabling younger generations to step onto the property ladder.
The Financial Reality of First-Time Buyers
Recent data from Legal & General highlights the scale of this trend:
The average financial gift or loan from family members to homebuyers last year was substantial, with figures reaching approximately £78,000 in London, where the average home costs around £675,000.
Nationwide, almost half of under-35s who recently bought a home received financial assistance.
In total, an estimated 335,000 house purchases were supported by family contributions, amounting to billions in family-funded support.
However, while this assistance is invaluable, it often lacks formal structure. Many families provide financial help without clear agreements on whether it is a loan or a gift, leading to potential conflicts and legal complications down the line.
Loan vs. Gift: Understanding the Differences
When family members provide financial support for a home purchase, the arrangement can typically take one of two forms:
1. Loan
A loan means that the money is expected to be repaid. Ideally, it should be formalized through a loan agreement, outlining:
Repayment terms (fixed schedule or flexible)
Whether interest will be charged (and if so, the tax implications)
Whether the loan is secured (i.e., registered against the property) or unsecured
Many families opt for unsecured loans due to banks’ reluctance to approve mortgages with additional creditors on the property. However, this creates challenges—if a child defaults on repayments, would a parent be willing to take them to court?
Surprisingly, only 8% of families seek financial advice before making family loans, and just 14% obtain legal guidance. Without proper agreements, misunderstandings can arise, and repayment expectations may remain unclear.
2. Gift
A gift is a simpler approach, as there is no expectation of repayment. However, gifting large sums has tax implications:
Inheritance Tax (IHT): Under the seven-year rule, gifts fall outside a person’s estate for IHT purposes if they survive for seven years after making the gift.
Equality Among Siblings: Parents may need to consider whether gifts to one child will be balanced by equivalent support to other children in the future. Indexed-linked gifts (adjusted for property market changes) can help ensure fairness.
Hotchpot Clause: Parents can include this in their Will to ensure lifetime gifts are accounted for when dividing their estate among heirs.
Protecting Family Wealth
In addition to structuring financial support correctly, families should take steps to protect assets, especially when the recipient is in a relationship. Key considerations include:
Declaration of Trust: Defines ownership shares in the property, preventing disputes if a relationship ends.
Cohabitation Agreements: If an unmarried partner is contributing to household bills but is not a legal co-owner, this agreement clarifies financial responsibilities.
Prenuptial/Postnuptial Agreements: If a child is getting married, these can protect family contributions from future claims in the event of divorce.
Without these safeguards, a partner who contributes financially to a household (but is not legally named on the property) could make claims on the property, leading to costly legal battles.
Alternative Support Options
If a direct gift or loan isn’t feasible, parents can explore alternative ways to assist:
1. Guarantor Mortgages
Parents can act as a guarantor, agreeing to cover mortgage payments if their child cannot. However, this means:
The parent's financial position may be affected.
There are limited lenders offering this arrangement, particularly if the guarantor is near retirement.
The parent’s own borrowing capacity may be impacted.
2. Joint Mortgages
In a joint mortgage, the parent’s income is used to strengthen the child’s mortgage application, but this comes with potential downsides:
The parent becomes a co-owner, meaning they could be liable for higher Stamp Duty as an additional property owner.
If they later transfer their share to the child, there may be Capital Gains Tax implications.
As financial pressures increase, more families are turning to alternative funding methods, including:
Lifetime Mortgages & Equity Release: Parents unlock home equity to provide gifts to children while starting the seven-year inheritance tax clock.
Pension Withdrawals: Some parents consider withdrawing from pensions to provide financial assistance, but this should be carefully evaluated with a financial advisor.
Practical Steps for Families
To ensure financial support is structured properly and avoids legal or tax pitfalls, families should:
Seek Legal & Financial Advice early in the process.
Have Clear Conversations with children about whether the money is a gift or a loan.
Document Everything: Use loan agreements, deeds of gift, declarations of trust, and wills.
Review Wills & Powers of Attorney: Ensure estate planning accounts for financial support provided during one’s lifetime.
The Bank of Mum and Dad is now one of the UK’s largest "lenders," ranking 6th in the country in terms of financial contributions to home purchases. However, with large sums of money changing hands, proper documentation and planning are essential to protect both the giver and the recipient.
By structuring financial support wisely—whether as a loan, gift, or alternative arrangement—families can avoid disputes, ensure fairness among siblings, and safeguard their wealth for future generations.
