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Prenups from the Bank of Mum and Dad

Parents naturally want to help their children buy somewhere to live, or set them up in life, and often this occurs on marriage. The so-called Bank of Mum and Dad will give or lend £5 billion this year. But given that more than 50% of marriages end in divorce, parents increasingly want to protect their investment if the child’s relationship comes to an end.

A prenup is a statement of intent or aspiration about what people want to happen to their finances if their marriage breaks down. Prenups are not binding on a court, but they will generally be followed if the prenup is fair and appropriate, and as long as any children in the marriage are provided for. Both parties also have to have access to legal advice.

With parental gifts, parents are increasingly seeking prenups stating that in the event of a divorce they would like the gift to be part of their child’s inheritance.

An alternative to giving money and asking for a prenup is for parents to make a loan of money to their child. This allows a binding declaration of trust to be prepared. But there is a potential tax implication. The parents will own a share of the property the child buys, and may therefore be liable for the 3% stamp duty surcharge on second homes and also for capital gains tax when it is sold.

In general terms, there is a great advantage in setting out in a document the terms on which a gift or loan is given. It can avoid a lot of tense discussion, if not outright disagreement, if the relationship fails. A relationship breakdown or divorce is never going to be easy, but where parents are also involved because of a gift or loan they gave in happier times, the situation can be even worse for all concerned.

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