Parents who lend to their children to help them to buy a home can find it difficult to get their money back, according to property lawyers.

In situations where a parent claims that money was made available as a loan, rather than a gift, and the child believes otherwise, the onus is on the parent to prove this if the case goes to court. And as these discussions are frequently verbal, and not always precise and thought through, finding the evidence is proving challenging for many.

“The Bank of Mum and Dad can face an uphill struggle if there isn’t anything in writing that acts as a legally binding agreement to repay a loan, or as evidence to confirm that mum and dad were intended to have a share in the property,” says Greg Williams, a barrister at Coram Chambers in London who specialises in family law disputes.

In extreme examples, without a formal document stating that the money is a loan or an investment, parents can lose not only those funds, but hundreds of thousands of pounds in legal fees and expenses.

The Bank of Mum and Dad is the UK’s tenth biggest lender, involved in one in five property purchases. It will give or lend an estimated £6.3 billion to family this year, with the average loan being £24,100. One set of parents were almost left homeless after they sold their property and put the proceeds into a new home, which they bought with their two sons. The parents lived in the basement of the property. When the sons sold the property, one of them viewed the parents’ contribution as a gift.

“The [parents] had not placed any restriction on the sons selling the property while they remained there, and then the sons sold, and mum and dad had to leave,” says Colin Young, a partner at the law firm Boodle Hatfield who worked on the case. “The parents had to go to court, to argue that they had an interest in the property.”

But the parents were unable to prove their claim and “the property was split 50-50 between the sons, with no money going to the parents", Young says. He assumes that one of the sons gave some or all of his share of the money back to his parents, though he doesn't know for sure. "The parents had not put in a declaration of trust, which was their downfall," Young says.

A declaration or deed of trust is a legally binding record of the financial arrangement between property owners. Without one "the court will look at whether anything was set out in writing, even informally by email or text message". Williams says. "Without something in writing it can often be one person's word against another's.

"The judge is left trying to look at things after the event, skewed by everyone's memory and experiences, and objectively infer what intentions must have been."

There has been a sharp increase in the number of court cases between parents who have loaned money and their children or their children’s partners. Quanta Capital, which specialises in litigation funding, says that the number of cases it handles has trebled in the past five years, from five to fifteen a month. The increase is likely linked to rising property prices — buying a home has become increasingly expensive, so more parents are helping their children financially, and with greater sums.

A common situation, according to Fraser Wright of Quanta Capital, involves parents trying to get their money back when their child splits from a partner. One set of parents lost £1 million and spent a further £380,000 in legal fees and costs after intervening in the financial proceedings of a divorce between their son and daughter-in-law, Wright says. The parents did not want half of the £2 million they gave to the couple to buy a home to go to their soon-to-be ex-daughter-in-law, arguing that it had been an investment in the property.

However, as they were unable to provide evidence to back up their claim, they lost the case, with the judge ruling that the money had been a gift. The parents had to pay the daughter-in-law's legal costs in addition to their own.

There are four ways in which parents can help their children to buy a home: giving money as a gift; a soft loan (ie one that is commercially unenforceable with no interest clauses, monthly re-payments or time limits); a hard loan, sometimes with interest payments, but not always; and by investing in a property in return for a share of it.

It is rare for parents to draw up a legal document, which costs between £1,500 and £10,000. This may be because they trust their child and his or her partner, but they may also be wary that if there is a formal document outlining their contribution as a loan, it could deter potential mortgage lenders. When parental money is involved, brokers and lenders usually require first-time buyers to have a “gifted deposit letter” confirming that the funds do not have to be repaid.

Adrian Anderson of Anderson Harris, a broker, says that, in his experience, money from parents for the deposit on a child’s home has always been in the form of a gift. If it were a loan that had to be paid back “this would lead to a lot of questions from the bank”. A gifted deposit letter can “some times be legally fatal to [parents], who later seek to argue that their agreement was something else. Such litigation can be risky, and the loser is ordered to pay the winner’s costs,” Harris says.

Other problematic scenarios include a parent dying after giving money to one of their children and a sibling seeking to have it factored in when it comes to splitting an estate, or parents divorcing after loaning money to a child and one of them taking legal action to have their share returned.

Legal Aid for this area of the law has been all but abolished, which is why companies such as Quanta Capital exist. For parents borrowing money to fund a legal case, the interest rate is about 18 per cent a year or 1.5 per cent of costs a month. If the parents lose the case they do not have to pay.

This article first appeared in The Times and The Sun on 31 August 2019.