Author: Wellers

Why Legal Advice is Essential to a BOMAD Property Transaction

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Acting as the Bank of Mum and Dad (BoMaD) in order to help a son or daughter meet the cost of buying a property or undertaking any other significant capital expense may seem like the most natural thing in the world to do. However, unless the terms, detail and conditions of the parental monetary assistance are laid out to a professional standard, any vagueness or ambiguity risks placing the parties concerned at risk of acrimony and, potentially, financial insecurity.

This is why it makes sense to take legal advice when committing to any Bank of Mum and Dad transaction. In fact, it is precisely because the assistance is so deeply personal and familial that contractual terms should be laid out as they would in any other financial agreement; the potential for traumatic financial and relationship fallout is simply too high in the event that anything goes awry.

Perhaps the biggest question facing those engaged in a BOMAD transaction is whether the sum constitutes a gift or a loan. All too often, the parties involved neglect to clarify this simply because they do not want to have to negotiate the difficult details involved.

Sadly, an act of generosity in offering financial assistance to a loved one may, at the time, be carried out amidst tears of gratitude and vague promises of “I’ll pay you back as soon as I can”, but once the house is bought and the For Sale sign comes down, the legal position of the parties may not be clear.

How NOT to do it – a case study

In 2019 the UK courts heard the case of a woman, Mrs A, who sought to reclaim money from her deceased son’s £815,000 estate, claiming that she had loaned £130,000, her life savings, to help him purchase his home.

However, the court hearing the case accepted arguments presented by the deceased man’s widow that the money was a gift rather than a loan, holding that there is a presumption that payment from parent to child constitutes a gift unless otherwise stated; in common law this is known as the Presumption of Advancement.

Mrs A, informed the court she had possessed material proof that she had been providing a loan rather than a gift but that it had “now disappeared”. Had the mother been able to present such documentation to the court it is likely that the judge would have reached a different decision in the case; however, as it was incumbent upon her to prove the monies were a loan, her case failed.

The judge stated: “This is little more than a blatant attempt by [Mrs A] to reduce the residue of [her son’s] estate, which would otherwise go to [his] widow…which is something [Mrs A] clearly finds hard to cope with.”

Conclusions

In an era when BOMAD assistance is increasingly the only way for the children of baby boomers to get a foothold on the property ladder, legal advice from an experienced solicitor should be considered the only prudent course of action when undertaking such a transaction and, if the worst comes to the worst, when a BoMaD dispute ensues.

There is no substitute for having the terms and conditions of the financial transaction laid out in writing, usually in the form of a “Deed” signed by all the parties involved, so that proof is visible at a later date. This is likely to include details of the following:

  • The amount of the gift or loan
  • How much, if any, is to be repaid
  • How and when any money due will be repaid
  • Whether any interest will apply
  • What will happen in the event of the death of the child
  • If the sum is a gift whether it might become a loan in the event certain conditions are met

However, BoMaD lenders should know that many banks and building societies require the buyer of a property to provide written proof that a mortgage deposit sum is non-refundable and unconditional, so if you wish to help your child buy a home there may be alternative structures to consider, such as becoming a guarantor or making a joint purchase, although these have risks associated with them, and the latter option mayhave Stamp Duty Land Tax, and Capital Gains Tax implications. The impact on Inheritance Tax (IHT) also has to be considered, and parents, and children, should review their Will, for instance, if the child being assisted has siblings, who may need to be treated differently.

Wellers – BOMAD solicitors

Wellers is a multi-disciplined legal firm which brings together its expertise on property law, family law and private client services such as Wills and trusts so that you can have the level of confidence and clarity you need when proceeding with a BOMAD transaction.

Whatever your BOMAD issue, contact Wellers today for help.

CGT and Shares in Estates Valuation Trap

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In the UK, there are quite generous exemptions from Inheritance Tax (IHT) which apply to business assets. One problem with making use of such exemptions is the effect this may have on the subsequent value of the relevant assets for Capital Gains Tax (CGT) purposes. Under S274 of the Taxation of Chargeable Gains Act 1992, the ‘base cost’ value of such assets for future CGT purposes is the IHT value, provided that value has been ‘ascertained’.

This can be especially important when assets are aggregated for IHT purposes. For example, if a deceased person owned 15 per cent of an unquoted company’s shares in his own name and had an indirect interest (say through a trust in which he held a life interest) in another 40 per cent, the IHT valuation would be on the basis of having a controlling (greater than 50 per cent) interest. If the company is a trading company, Business Property Relief (BPR) would apply and in the case of a controlling interest, BPR is given at 100 per cent.

The Capital Taxes Office will not in such circumstances wish to enter into negotiations about the value of these shares and will simply regard the value transferred as nil. The value, therefore, will not have been ‘ascertained’, which may lead to a later dispute about the real value of the shares at the date of death, when the value may well be much harder to ascertain or at least agree.

One possible way around this dilemma is for the executors to submit a valuation of the shares, preferably with the benefit of a valuation by an appropriate professional. This is likely to be ignored by HM Revenue and Customs when dealing with the estate taxation, as 100 per cent BPR will apply. On a subsequent disposal of the shares, that valuation – probably unchallenged – can be used to help to justify the base cost in the CGT computation. […]

Divorce and Foreign Nationality

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Approximately one in six marriages in the European Union is between persons of different nationalities. Not surprisingly, approximately one in six divorces also involves spouses of different nationalities.

This can make for some complexity on divorce as to which country’s law should apply to the divorce proceedings. This is eased to some extent by the fact that some jurisdictions will apply the law of the nation of the person being divorced, rather than their own law, when appropriate. For divorce proceedings commencing in this country, UK law is applied no matter what the nationalities of the divorcing couple are.

The UK has opted out of an EU proposal that seeks to set a list of criteria for deciding which country’s law should apply on divorce, the main criterion being the country in which the couple had its last home. This will no doubt come as a relief to some, as the UK’s approach to financial settlements is among the most generous in the world. Also, prenuptial agreements are not binding in the UK, as they are in many European countries – most of which also exclude from the pool of assets to be divided on divorce any assets acquired through inheritance. However, following a decision of the Court of Appeal in 2009, ‘prenups’ now must be considered by the court where they have been entered into freely and without undue influence. Post-nuptial agreements are normally enforceable.

By and large, where there is doubt about which country’s law should apply, the divorce will be dealt with under the law of the country in which the divorce proceedings were first commenced. This explains why the UK is a favoured place to commence proceedings in ‘big money’ cases.

A 2011 case confirmed the principle that where the question of in which country the children of the marriage should be raised is concerned, the needs of each child must be considered separately: the children are not to be considered ‘as one unit’.
In recent years a number of cases have come before the courts involving foreign nationals or where there is a foreign residence element to the divorce. The British courts have been robust in their defence of their right to have jurisdiction in such cases. In 2012 the UK improved the ability of parents to enforce residence orders if their children have been taken to a foreign country, when the provisions of the 1996 Hague Convention came into effect.
A 2013 case confirmed that where a foreign court has no outstanding matters before it with regard to the residence of a child, the UK court does not need the foreign court to formally renounce jurisdiction if the child concerned has become habitually resident in the UK.
More recent cases have confirmed the UK as a jurisdiction in which a fair hearing and robust enforcement of court rulings apply: in a 2015 case, a husband who refused entirely to compy with court orders concening his worldwide assets was ordered to be imprisoned for contempt of court.
If you are facing a relationship break-up with a foreign element, contact us for advice, inlcuding revising your will to reflect your new circumstances. […]

Tax Issues for Owners of Two Homes

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Ownership of two homes in the UK is becoming more commonplace as couples who both own houses marry, houses are inherited, parents buy houses for their children to live in, or people just buy a place in the country, either to let or to escape to at weekends.

Owning two houses does have significant Capital Gains Tax (CGT) implications. When house prices are rising fast, many owners face CGT liabilities. CGT on property is very complex. Here are some of the main planning points, but this is just an outline guide. Always take professional advice before going ahead with any significant transaction.

Once you have two houses, you have two years to make an election regarding which is to be your ‘principal private residence’ (PPR). This is important since PPRs are exempt from CGT. In general, it is sensible to elect for the property that is expected to rise most in value to be the PPR. A married couple can have only one PPR.

If a house is sold which has been the PPR and was actually lived in at any time, the last three years of ownership are treated as private residence (this period is being reduced to 18 months for sales after April 2015), so if a house has been owned for ten years, lived in for six years and then rented out for four years, only one tenth of the gain will be chargeable. There are a number of other exemptions which apply for periods of non-residence for various reasons.

If your residence has extensive grounds (over 0.5 hectares), a chargeable gain may arise on the land. There is an exemption, where the grounds are ‘required for the reasonable enjoyment of the property’. Where a large landholding is being divided into lots and sold for development, beware of selling the house first and retaining the land, since CGT may then arise when the land is sold.

If you rent out part of your private residence, or use it for commercial purposes, it will normally become chargeable, although (at least) the first £40,000 of the gain will be exempt if the letting was for residential purposes.

Since transfers between spouses are exempt from CGT, where a chargeable gain is expected it can, in some circumstances, make sense to transfer an interest to your spouse before sale. This will make use of both CGT exemptions.

HMRC are likely to challenge a ‘principal private residence’ election for a second property where it is sold reasonably soon after acquisition and there is a gain chargeable to CGT. In such cases, a demonstration of actual residence will be critical for a claim to succeed.

One common circumstance in which this occurs is when a home is inherited and subsequently sold.

In the 2015 Budget, measures were introduced which will adversely affect the owners of homes in the UK and abroad who are resident outside the UK and who sell their UK home at a profit.

From 2017, the allowable interest on mortgages on ‘buy to let’ properties is to be restricted to the basic rate of tax.

In addition, higher rates of Stamp Duty Land Tax (SDLT) are charged on purchases of additional residential properties (above £40,000), such as buy to let properties and second homes. The additional rate is be 3 per cent more than the ‘basic’ SDLT rate.

The Government has published guidance on tax on selling property. Such decisions should always be undertaken with the benefit of professional advice.



Source: Private Client Library – Articles

Alcoholism and Mental Capacity

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In order to make a valid will, you need to know your own mind – and it helps to have a solicitor on hand to advise you. That was certainly so in a case in which a businessman left the lion’s share of his £1 million fortune to a friend and colleague a few weeks before he died from alcoholism.

Against medical advice, the man had discharged himself from hospital ten days before he signed his last will. He left his shareholding in his company – by far his largest asset – to a friend who had worked with him for over 20 years. The friend was also bequeathed 75 per cent of the residue of his estate.

The man’s widow and three sons, who received 25 per cent of the residue, challenged the validity of the will on the basis that the friend had brought undue influence to bear upon him at a time when he was extremely sick and vulnerable.

The High Court acknowledged that the friend, who had made all the arrangements for execution of the will, was in a position to exert influence. In upholding the will, however, it found that he had not overstepped the mark. The man had wished the company that bore his name to carry on after his death and had viewed his friend as presenting the best prospect of achieving that objective.

The friend may have encouraged or even persuaded him to sign the will, but the Court was satisfied that he had done so of his own volition and had not been overpowered. The evidence of the solicitor who had drafted the will – who was convinced that the businessman was of sound mind, although obviously unwell – was also a crucial factor in the case.

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