Parents should be careful when making ‘loans’ to their children.
With current restrictive lending conditions, children are increasingly turning to their parents to help find deposits when buying their first home.
In this situation, the parents must decide on the terms of the loan. These terms should be set out in writing and should at least state the amount of the loan, the rate of interest payable (if any) and the capital repayment terms.
They could even take a charge on the property to secure their loan, subject to the agreement of any lender to make this more robust.
If it is not clear that a loan has been made, then the money may never be returned, as the child may treat it as a gift.
There was a recent case where parents made a £150,000 loan to a married child without documenting it. Unfortunately for all parties, the child died without making a will. This meant that all he owned passed to his widow and because there was no evidence of a loan, the parents could not recover the £150,000 – an unintended and unwelcome consequence for the parents.
