Why is there any uncertainty about parental contributions?
Legal caution is not usually a dominant idea when trying to help children, even adult ones, so often what is done is practical rather than careful. Many parents let their children have the money without having the difficult conversations that perhaps they should.
Parents are believed to be more likely to be generous than mean:
Who would give their child a stone if they asked for bread, or a serpent if they asked for a fish?
In the case of foodstuffs, once given the donated item is gone and is not able to be returned once used for its normal purpose, so the question of ‘gift or loan?’ does not arise.
However, money used to buy a home has not disappeared, but has been transmuted into a tangible asset. ‘Bricks and mortar’ – the frequent building material of modern permanent homes is regarded as ‘an investment’ and indeed many people put money into property – buildings – rather than into savings schemes. In law ‘real property’ is land and the buildings erected upon it and due to its supposed permanence, it has a special legal existence, such that since the 1920s, a person’s ownership of real property is registered at the Land Registry.
What is the Land Registry?
All the land in England and Wales belongs to somebody. The state – through the person of the reigning monarch aka ‘the Crown’ ultimately ‘owns’ the kingdom as indeed England and Wales are properly regarded in law. However, in reality, other people ‘own’ many parts of the realm in practical terms. That level of practical ownership is what is registered at the Land Registry.
What do I need to know about the Land Registry?
Ownership of land under property law can take a number of forms, but the simplest is that people can be registered as ‘proprietors’ (owners) of the land and their details included on the Register (the Proprietorship Register) as such. However, it does not stop there as people owning land can make solemn promises or be bound by agreements which are related to the land. The most common right to be registered is a ‘mortgage’ which is a binding arrangement that means that when the property is sold, the lender gets the money they are owed. The legal arrangement for that is called a ‘mortgage’ and before registration was introduced, what that meant was that the borrower had to give their Title Deeds – the documents which proved they had become the rightful owner – to the lender who would not return them until they had been paid. Without the Deeds to prove ownership, a borrowing owner could neither borrow money against their property rights nor sell those rights to somebody else. A ‘mortgage’ of not having those rights effectively made the property ‘dead’ and was a ‘pledge’ so a ‘mort-gage’ over land was a serious promise that made ownership rights dead so far as dealing with the ownership of the land without the consent of the lender. We call a debt connected with an asset a ‘charge’ and ‘mortgage charge’ is a debt which can and should be registered in the Charges Register at the Land Registry.
As well as ownership and secured debt, the Register has a section for Restrictions and Easements which sets out what an owner can and cannot do and also rights regarding neighbouring properties which affect that piece of land.
Can people lending money register a loan?
Yes – a loan can be put on the register as a charge and the document which sets out the terms of the loan e.g. how repayment is to be calculated, when it should be repaid and any other agreed terms can be put onto the title and the money ‘secured’ against claims by non-owners.
Why would somebody not register their loan?
Working out all those loan details is not always easy and sometimes not all of the terms have been agreed with the precision that is needed for a legal document.
As a person may be using the money as a deposit and the remainder borrowed from a commercial lender, it might not be permitted for there to be further registered borrowing and so the family lenders put off registering their rights to repayment. That makes their loan an ‘unsecured’ loan and misses the certainty that registration brings about repayment.
Sometimes people providing money are requested to sign to say whether it is a gift or a loan and often people complete that form to say ‘gift’ when in fact there are circumstances under which it would be repayable.
The law recognises the existence of ‘conditional gifts’ and so not having a registered charge is not the end of the story, even if the lender has somewhat misleadingly signed to say it was ‘a gift’.
Does it matter whether it was a loan or a gift?
In divorce cases, where people have a formalised relationship, then when a court is asked to make a decision dividing the assets when they split up, family law permits a judge to look at ‘all the circumstances of the case’ and even if there is uncertainty as to whether money was lent or given, the judge can still decide how it should be treated and whether it should be repayable and by whom: one spouse, both spouses or nobody at all.
In cases of people without that formality to their relationship – ‘cohabitees’ – people who live together then the law is not about fairness and discretion, but mainly about property law. Property law includes Trust law, such as TOLATA and whilst registration of legal interests is important, sometimes trust law steps in to plug some gaps.
A loan is repayable and a true gift is not.
If the giver dies, the gift can become taxable, but a loan would be owed to the deceased’s estate and either paid back or taken into account as part of that person’s inheritance.
People are supposed to tell the Inland Revenue if they make substantial gifts, so that the tax authorities know when it was given and can calculate whether any tax becomes payable on it in the future.
That leaves ‘conditional gifts’ as a grey area of uncertainty.
What is a conditional gift?
Sometimes people will pass something to another person for a particular purpose. They may not expect the thing back, but they want it used for that purpose. It might be a piece of furniture, a picture or ornament, an heirloom that has been in the family for generations like a watch or it might be money.
For example, when parents retire or trade down to a smaller house, they may decide to use that as an opportunity to benefit their children – perhaps providing a deposit for a home, assisting in them getting a larger property or having work done to improve a property. If a parent says ‘Here is £20,000 to have a new kitchen!’ then that money should be used to fund the project or ‘Here is £30,000 as a deposit for a house’ in which case the money should be used for that purchase. Those payments appear ‘gifts’ but have strings attached.
During the period from the passing of the money until it can be applied to the intended purpose, those funds will most likely sit in a bank account. Probably, the person will put the money in a savings account and it might be mixed in with other money. All well and good if the person is financially sound, but things can change and sometimes money gets used for something for which it was not intended. A dutiful child would discuss that with the donor and seek their blessing on the change of use or deferral of that project – ‘We will get the kitchen done when I am back in work’ for example or ‘We cannot get a mortgage until we are working full-time again’. In those cases, the purpose can still be fulfilled and it is unlikely that the conditional nature of that advance of money will become an issue. ‘Sorry, I have spent the money on living expenses since I went part-time’ might cause trouble though as the money has not been applied as stipulated.
Conditional gifts could even include providing a home for an elderly relative – if a parent sells up and passes the money to their child or their child and spouse so that they can have a home with them, should the couple separate, even if everybody called it ‘a gift’ the strings attached might entitle them to some degree of repayment, even if that was not expected when the family were living as one.
Such situations really do benefit from professional advice tailored to the particular circumstances and inspecting the evidence of the full intentions/conditions, which might not have been expressly recorded.
Will I need to share all my savings if we split up?
If you are in a formalised relationship, then the assets that either of you own are to be disclosed and can be distributed by a judge when the state of relationship ends (civil partnership/marriage).
The assets may be shared equally, but often are not. However, in long relationships, the starting point is that a judge looks at whether half the total pool of assets meets the needs of the former couple and only then looks at whether the source of those assets should be considered. In a short marriage, then it may be appropriate to look at what they had before they got together and consider sharing what they had jointly as a couple rather than share everything that they have equally.
If an advance of money is a loan or conditional gift, then there are legal arguments to say it must be repaid and taken out of the calculations. With something expressed as a ‘gift’ the arguments are likely to be more complicated and the factors more nuanced so money being a ‘loan’ is an important distinction.
How do I prove the money my parents gave me was a loan?
The obvious answer should be: ‘the loan has been registered at the Land Registry’, but that can only apply to completed property purchases and only then if there is not a corporate lender who specifies that no further charges can be registered without their consent.
It also requires that there has been proper certainty about the terms, which is also an area where some loan arrangements lack the completeness to be registerable.
Short of registration, it is all about intent and evidencing agreement.
Without registration, then the agreement should be looked at – was there any documentation prepared to show it was a loan? What appears in any other documents? Is there evidence that the money was repayable?
The most important aspect is that – was the money to be repaid and in what circumstances?
A formal letter from the person passing over the money and countersigned by the person getting the loan is probably the best that can be found short of registration, but if there is other evidence that casts doubt that the money is really to be repaid, then it can be inconclusive.
A parent getting repaid by another of their children under a similar arrangement would suggest that it was a real loan, but forgiving that loan (and telling the tax man that it has become a gift) does not mean that the lender can be expected to do so in all circumstances. It is unhelpful for other loans to have been converted to gifts, especially if that happens by instalments within the tax rules each year so that over a period of time, all the ‘loan’ is eventually forgiven, as that looks like an Inheritance Tax planning scheme. That just makes proving intent that is was a repayable loan more difficult to prove.
When ought I take legal advice about a loan?
It is never too late to clarify intentions and better to do so when the spouses appreciate the help. Ideally that would be before any money is passed over and certainly best done before the relationship breaks down.
Each family is different and each couple is unique, so a solicitor would need to know all of the circumstances to form a view as to whether a payment was likely to be a loan to be repaid, or a gift to be considered part of the pool of assets.