When the Bank of Mum and Dad calls up

The Bank of Mum and Dad is now a well-known phrase.  Of course, families have always and will always try to help each other.  Parents or grandparents regularly help children, whether that’s onto the property ladder, with funding for post-graduate education, buying that new car or clearing off old or new debt for example.  Historically these arrangements, or any similar inter-family assistance, were based on trust and thankfully most arrangements were honoured.

All too often however, our dispute resolution team are consulted about family disputes arising from a fall out over transactions with the Bank of Mum and Dad.  The transfer of funds, willingly provided and gratefully received at the time, turns out be conditional. Did those receiving assistance realise that they may be acquiring obligations along with the money? The most common issue being that the transfer was a loan and not a gift. 

The sums involved can be relatively small or substantial but the impact on family relationships in either case can be devastating.  For each side the insistence on repayment or the failure to repay represents a dreadful breach of trust by the other.  We have acted for both sides of what becomes a significant family rift and the rift rarely closes.  There are grandchildren who have never met their grandparents because the parents and grandparents fell out over a transaction that was not put in writing.

What is to be done where money has changed hands but the basis on which it did is disputed? In most cases the starting point is to consider whether the transaction was a gift or a loan. 

Look at it from this perspective: If this was a transaction with a third party, with that third party handing over money, would the assumption by the parties not be that it was a loan?  Why shouldn’t that person expect to be re-paid?  Would the recipient of the funds not assume that he or she would have to repay the money?  Should family members not make the same assumption about inter-family transactions?  Often they will but then why are there so many disputes about this issue?  The reason quite simply is that there is often a lack of clarity because the issue has not been discussed.  Why?  Because we are concerned about family relationships and a reluctance to discuss money. 

The law in Scotland does not take the relationship between parties into account – there is a legal presumption against gift.  The transaction will be viewed as a loan and is therefore due to be re-paid and will be repayable with interest.  It needs to be borne in mind that unless there was an agreed time limit for repayment, which of course means that there would need to be an acceptance that there was a loan in the first place, the lender can seek repayment at any time.  Also worth noting is that the debt will also transfer to the lender’s estate if he or she dies, and an executor may be less altruistic than the lender, particularly if the sum involved is substantial.

Many cash injections are modest and short-term.  However, the advance of funds could however be more significant.  It is not unusual for parents to buy their children their first homes.  Without the protection of a standard security, with title being in the child’s name, it is his or hers to sell without reference to the funding parent.  If it was a loan then it is important to nail down the repayment criteria. 

Another all too common scenario is the assistance to buy the new matrimonial home, which seems a splendid idea until the happy couple separate and the child-in-law wants his or her share of the equity in the property. 

Turning to business matters, there are many small firms and companies which exist because the Bank of Mum and Dad put up the capital.  How was that to be repaid?  Each of these can involve large sums of money.  Can you afford to give it away or to have to pay it back?

If you are providing financial assistance to a family member consider very carefully what you are doing.  Are you giving away the money or are you lending it?  Are there any events that would lead you to ask for the money back? There should be no shame or embarrassment in making that clear from the outset.  Having done that, you should also document it.  A simple IOU may suffice if the funding is to be a loan.  If there is to be a timeline for repayment then document that as well.  And consider whether there are circumstances that might convert a loan into a gift.

Failure to take precautions may leave the lender facing the agonising decision as to whether they should write off what was intended to be a loan or risk dividing a family.  The best thing to do is to take legal advice.  This will enable you to cover all the bases and potential quirks of fate.  There may be a short-term price but better that than the destruction of the family.