Parents concerned about rising house prices are increasingly providing money to their children to assist them with their first house deposit to get them on the property ladder.
The simplest option for parents in such circumstances is to gift money to their child so that they can purchase their own home. A simple gift has no strings attached and as such parents will likely have no rights to reclaim the money at a later date. Couples sometimes use these gifts to invest in shared property which can later be a cause of conflict in the case of a separation.
The Property (Relationships) Act 1976 (“the Act”) records that property acquired from a third party (i.e. a parent) by gift is considered that person’s property, however, if that gift is then put toward the family home (the home that the couple resides in) then that gift loses its separate property status and becomes relationship property. The general rule under the Act is that once you have been in a qualifying relationship* for three years or more, in the event of separation all relationship property should be divided equally. For more information on what relationship property is, see our articles here.
What that means in real terms is that if your child and their partner are looking to buy a home and you gift them $50,000 toward the house deposit, in the event that the relationship breaks down the entire equity in the family home, (including the gifted sum) will be considered relationship property and your child’s now ex-partner will be entitled to half of the total equity in the house.
Even if your child’s partner said that they wouldn’t make a claim against the amount gifted, that will not be enough to bind that person to that “promise” in the event of separation.
There are ways for you and your child to prevent the gifted sum from becoming relationship property.
Section 21 of the Act allows people to contract out of the Act by entering into a “prenup” or Contracting Out Agreement. Such an agreement can be entered into at any stage of the relationship. Under this agreement, it would record (among other things) that the partner who had received the gift from their parents would retrieve the gifted sum in the event of a separation.
Contracting Out Agreements
In order for a Contracting Out Agreement to be legally binding it must:
- Be in writing;
- Each party must receive independent legal advice before signing the agreement;
- The signature of each party must be witnessed by a lawyer; and
- The lawyer must certify that, before that party signed the agreement, the lawyer explained to that party the effect and implications of the agreement.
A Pre-nup/Contracting Out Agreement will provide parents and their children with certainty as to what will happen to the gifted sum in the event of a separation. For more information on Contracting Out Agreements see our earlier articles – Contracting Out of Relationship Property Laws, and 10- Point Guide to Contracting Out Agreements.
There may be other ways to protect a financial contribution that a parent/family member makes to a child’s first home. See our earlier article, ‘Thinking of Advancing Money to your Children to Assist with a House Purchase’ for further information.
It is important to take early legal advice about these issues to protect your interests. Our expert family lawyers at Morrison Kent can assist you to determine the best approach for you and your family.
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*A qualifying relationship is a marriage, civil union or de facto relationship of three years or more. In some circumstances, the Property (Relationships) Act can apply to relationships of less than three years although the equal division rule does not then ordinarily apply to them.