IN A previous column, I mentioned the benefit of making gifts to children during the parent/grandparent’s lifetime.
One caller asked about how those gifts could be protected in the event of divorce. Here goes.
Divorces can more than often be a tricky, emotional time, and when it comes to a breakup, fairness doesn’t always apply. Some points to consider:
If you are making a gift, be sure to take legal advice as well as tax advice from your independent financial adviser or accountant.
It’s worth knowing if you are making a gift to assist a house purchase, lenders can often insist that the amount gifted isn’t repayable and they ask that is confirmed by the parent in writing. This isn’t always the case.
A parent can make loans to the children in an informal way with no documentation, and a court can often see these as an outright gift to the couple.
However, a carefully documented and official loan would be considered by the court as a true liability and agree that this is owed when reaching the financial settlement.
Remember the loan would have to be official and include all the correct terms: Interest payable, when payable, and when the loan is repayable. It would also need to fully comply with the consumer credit act.
If there was no loan agreement set up, parents could approach the court early to intervene in the divorce proceedings.
Remember that a court looks at ‘needs’ first, and the costs of rehousing and security of a family and the children could take precedent over loans.
If the parent wanted to fully protect a gift, the children could enter a pre or post nuptial agreement making it clear what will happen in the event of
divorce to any monies gifted. These will be very influential to a judge dealing with the divorce.
If the parent was making a gift specifically for a house purchase, the parents could establish a deed of trust and hold the property as ‘tenants in common’ with the parents being entitled to a percentage share of the property. That protects the monies loaned.
You could also register the monies given to the children as a loan and place a charge against the property. It means it is secured but could create problems for the children as lenders may be unhappy about this, and it could limit who they can get a re-mortgage from, very relevant in today’s tight lending market.
There is also the option of a conditional gift. It could be documented that the gift of the money advanced is repayable in the event of a divorce or separation.
If it’s an outright gift however (ie for mitigating inheritance tax) it should be documented as such and made clear there is no expectation of repayment. If it is seen as a loan, the gift would come back into the donor’s estate for calculation of inheritance tax.
If the recipients are unmarried, a cohabitation agreement could be considered to make it clear who will retain the gift or what needs to happen with a loan in the event of a relationship split.
And finally, when speaking to your independent financial adviser, accountant and solicitor, ascertain what tax implications may apply such as income tax on the loans or inheritance tax and capital gains tax on any part of a property you may come to have an ownership in.
:: Peter McGahan is chief executive of independent financial adviser Worldwide Financial Planning, which is authorised and regulated by the Financial Conduct Authority. If you have a financial question call 028 6863 2692 or email info@wwfp.net
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