With world events impacting property prices and interest rates, the Bank of Mum and Dad continue to be a significant source of funding in the UK, particularly for first time Buyers. However, many parents don’t realise that that providing financial support, especially in the form of a loan, can expose them to serious regulatory, legal and financial risks.
Family loans can be Regulated Agreements
While family loans can feel informal, in legal terms most loans or other credit facilities between individuals can be caught by the Consumer Credit Regulations. Unless the arrangement falls within one of a limited number of exemptions, the Lender may need to be authorised by the Financial Conduct Authority (FCA) before they can grant loans.
There is additional layer of risk where a loan is to be secured against residential property as this can unintentionally create a Regulated Mortgage Contract which creates additional practical and legal responsibilities on the Lender.
If Lenders require FCA authorisation and proceed without this, they run the risk that loans could be unenforceable and may be committing a criminal offence.
Ambiguity can lead to disputes and unintended consequences
In the absence of clearly drafted documentation, there can often later be disputes in the family in the event of death, divorce or separation and the courts are frequently required to decide if moneys advance are gifts, loans, contributions to equity or trust arrangements.
There can also be unintended consequences for parents around:
- Inheritance Tax implications, especially if a loan may be subsequently written off
- Deprivation of Assets if parents later are required to seek means-tested support
Vague or informal arrangements generally allow greater scope of challenge by interested parties.
Need advice? We’re here to help
Parents continue to pay a vital role in supporting the next generations – but acting as a Lender can carry real risk. The best way to protect all parties involved is to take advice and adopt the right structure and documentation.
If you’re a parent or other family member who is considering granting a loan our Corporate Commercial Team are here to help with clear, practical advice.
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