Property Law Unpacked – We are the Bank of Mum and Dad – can we protect our gift?
With rising house prices and more buyers relying on the Bank of Mum and Dad, parents often ask how they can protect the money they are contributing towards a deposit. December is a natural moment for these conversations, as families think about meaningful support rather than traditional gifts and look ahead to helping children buy their first home in the new year.
A key question is whether the contribution should be treated as a gift or a loan, how this affects what a mortgage lender will allow, and whether a declaration of trust is needed to ring fence the parental contribution if the child later separates from their partner.
In this edition of Property Law Unpacked, we explain how each option works in practice and what families can do to avoid unintended consequences.
1. Gift or loan – why the label matters
When you transfer money to help with a deposit, the law and the lender will treat it in one of two ways.
A true gift
With a gift, you give the money with no expectation that it will be repaid. Many parents see this as bringing forward part of an inheritance and want to see the benefit in their child’s life now.
Most lenders will only accept a parental contribution as part of the deposit if it is a pure gift. They usually ask you to sign a gifted deposit form which confirms:
- you are giving the money freely
- you do not expect repayment
- you will not have any interest in the property
On its face, that can feel at odds with the instinct to “protect” what you are giving. The key is to understand that there is a difference between a personal promise to the lender, and a separate agreement between the co-owners about how any equity is divided. That is where a declaration of trust comes in.
A loan
A loan is money that must be repaid. If you intend your contribution to work like this, the terms should be set out in writing, including:
- how much was lent
- whether interest is payable
- when and how it will be repaid
- what happens if the property is sold
Here, lenders are more cautious. A loan creates another creditor whose interest competes with the mortgage. Some lenders will insist that any parental loan is postponed behind the mortgage. Others will not accept it at all, because it may affect affordability.
In practice, many families decide to treat the money as a gift for lender purposes and then use a declaration of trust to ring fence that contribution if the property is later sold.
2. What is a declaration of trust and how does it protect you
A declaration of trust is a legal document that records the beneficial ownership of a property. It can sit quietly in the background for years, but becomes crucial when the property is sold, one owner wants to buy the other out, or a relationship ends.
For a Bank of Mum and Dad gift, a declaration of trust can:
- record how much you contributed towards the deposit
- set out how sale proceeds are to be divided in future
- protect unequal deposits between two buyers
- reduce the scope for dispute if things change later
A typical structure might say that on a sale:
- the parental contribution is returned in full to the child who received it
- sale costs and mortgage are repaid
- any remaining equity is split between the co-owners in agreed shares, for example 50–50
This allows you to support your child while still recognising that a partner may also have contributed to the property over time.
3. A real world example: the Christmas gift that stayed protected
Imagine this scenario.
In December, David and his partner Lucy agree to buy a flat for £450,000. David’s parents decide that, instead of more Christmas gifts, they will help with the deposit. They transfer £70,000 to be used towards the purchase.
The lender will only proceed if the £70,000 is a non-repayable gift. David’s parents sign the gifted deposit form to satisfy the lender. At the same time, David, Lucy and the parents ask for a declaration of trust.
The declaration of trust records that:
- • David’s parents have gifted him £70,000 towards the deposit
- • if the property is sold, the first £70,000 of net equity will be allocated to David
- • any remaining equity will then be split 50–50 between David and Lucy
- A few years later, David and Lucy sadly separate. The property is now worth £500,000 and, after repaying the mortgage and costs, there is £120,000 of equity.
Because of the declaration of trust:
- the first £70,000 goes to David, reflecting the original parental gift
- the remaining £50,000 is shared £25,000 each between David and Lucy
There is far less scope for argument. Everyone understands what was meant to happen from the outset, and David’s parents can see that their Christmas gift has been respected.
Without a declaration of trust, the full £120,000 would likely have been treated as joint equity to be shared between David and Lucy, and much of the parental contribution would have been lost into the general division of assets.
4. How this sits with lender requirements
It is natural to worry that having one story for the lender and another in a declaration of trust might cause conflict. Done properly, it does not.
The lender’s main concerns are:
- that the borrowers can afford the mortgage
- that there are no other secured interests which rank ahead of them
- that the property is good security for the loan
The gifted deposit form deals with your position as a potential creditor. The declaration of trust deals with how the co-owners share any equity between themselves. You are not given a charge over the property, and you are not being repaid by the lender. That is why lenders are typically comfortable with this structure.
Your solicitor will check the specific lender handbook requirements and make sure the documentation is consistent.
5. When a loan really is the better fit
Sometimes a pure gift does not feel right. Perhaps you are helping more than one child and want to keep things balanced. Perhaps you need certainty that the money will come back to you at a later date to fund retirement plans.
In these cases, a formal loan agreement may be the best option. Key points to consider include:
- whether the loan is to the child alone or to both co-owners
- how repayments will be structured, for example regular instalments or only on sale
- whether you want to charge interest
- what happens if repayments are missed
You will need to tell your conveyancer and the lender about the loan from the start so that it is factored into affordability checks. Your solicitor can also advise on how the loan interacts with any declaration of trust, and on wider tax and estate planning implications.
6. Questions to explore as a family
Before you sign anything, it can help to sit down together, perhaps over a quieter moment in the holiday period, and talk through some simple questions.
- Are you comfortable treating this as part of an early inheritance?
- Do you want your contribution to stay with your child if they separate from a partner?
- Are there other siblings and, if so, how will this help be balanced in future?
- Could your own circumstances change, for example health or retirement plans?
- How would everyone feel if the property went down in value rather than up?
Being open about these points now can prevent difficult conversations later.
7. Marriage and why a Declaration of Trust falls away
A point many families are unaware of is that a declaration of trust only protects a deposit while the couple remain unmarried. If they later marry, the property becomes part of the wider “matrimonial pot” and the declaration of trust no longer provides automatic protection in the same way.
This does not mean the original gift is unprotected. It simply means a different legal tool is needed.
How to protect a parental gift if the couple marry
If marriage is planned, or has already taken place, the most effective way to ring fence a parental contribution is through:
- A prenuptial agreement if the marriage is upcoming
- A post nuptial agreement if the couple are already married
These agreements can set out clearly that the parental gift remains the child’s separate contribution and should be returned to them if the relationship breaks down. Courts increasingly give weight to these agreements provided each party has entered into the agreement freely, has had the opportunity to take independent legal advice and has provided each other full and frank financial disclosure. The wealthier party must also ensure that the terms of the agreement do not leave the other in a “predicament of real financial need”.
Our Family Law team work closely with our Property lawyers where a declaration of trust needs to be supported by a pre or post nuptial agreement. This joined up approach helps ensure the intention behind a family gift is protected at every stage of the relationship.
How Laurus can help
We regularly advise parents and buyers who are using family support to get on the property ladder. In particular, we can:
- explain the pros and cons of gifts versus loans in your situation
- draft a declaration of trust that reflects your intentions clearly
- prepare or review loan agreements where repayment is expected
- liaise with your lender to make sure their requirements are met
- work alongside our Legacy team where there are wider inheritance planning questions
If you are thinking of being the Bank of Mum and Dad this Christmas or in the New Year, taking early advice can give everyone peace of mind.
For tailored advice on declarations of trust or family gifts towards a property purchase, contact our Residential Property team on 020 3146 6300 or hello@lauruslaw.co.uk.
About Property Law Unpacked
Property Law Unpacked is our practical guide to buying and selling property in England and Wales. Each article answers a real question our clients ask, breaking down the legal process in clear, straightforward terms so you can move forward with confidence.
