The importance of relationship planning

Alex Garrett, Executive Senior Associate & Family Solicitor at Holmes & Hills LLP, explains what a Declaration of Trust is, how it works in practice, and why it can be a valuable tool for clarifying ownership and protecting interests in jointly held property.

In many families, financial assistance from parents can play a crucial role in assisting adult children to purchase their first home or establish financial stability. A common strategy of inheritance tax planning is to utilise tax-free gifting to help allow children to get ahead in life whilst preserving family wealth.

However, in focusing on the immediate benefit of the gift, parents often overlook the legal risks that can arise if their children are in a relationship, at the time they receive that gift.

Because without careful planning, money intended to help your child could end up being shared with a former partner if the relationship later breaks down.

The impact on cohabiting couples

Declarations of Trust are increasingly common where parents contribute towards a deposit, particularly given the rising value of property and the size of family contributions.

But the law relating to unmarried (cohabiting) couples is notoriously very limited in scope.

Meaning that if your child uses gifted funds to buy a property with a partner and the property is purchased in joint names, if they do not then specify how the ownership in the property is to be divided then the property could be presumed as being owned jointly.

This uncertainty can be very concerning for families, particularly, if one party has paid the majority or all of the deposit of a property.

And in this instance, if the child were to later separate from their partner, this would mean the proceeds of sale of the property being divided equally and the gift provided by the parents, potentially being halved or substantially reduced.

The impact on married couples

Under English law, the courts have a wide discretion when dividing assets on divorce.

If a child who is due to marry benefits from receiving a significant sum of money as part of their parent’s inheritance tax planning strategy, there is still a high chance that those funds/ assets can form part of the overall financial resources available for division on divorce.

There is a risk that without identifying what should be considered joint property and what should be considered separate property at the outset of a marriage, that funds or assets intended to be ringfenced can form a part of the matrimonial resources to be divided on divorce.

Fortunately, there are ways to help ensure that financial support given by parents continues to benefit their child in the long term.

The two forms of relationship planning consist of:

• Declarations of Trust; and
• Pre-nuptial Agreements.

The role of Declarations of Trust

 A Declaration of Trust is a legal document that records the beneficial ownership of a property. It’s most commonly used in instances where co-owners have contributed different amounts towards the purchase price of a property.

This Declaration of Trust is then utilised to state each proportion of the property each person owns, how the proceeds of sale should be divided and how additional contributions will be treated.

Declarations of Trust should be used in instances where couples are cohabiting and not married as property disputes involving unmarried couples are addressed through a different area of law to married couples.

They reduce uncertainty and conflict on separation, confirming each party’s entitlement upon taking what is often one of the first and most important financial decisions in their lives.

Clarifying The Treatment of Pre-Nuptial Agreements on Divorce

There is often a misconception of the treatment of Pre-Nuptial Agreements on divorce. A Pre-Nuptial Agreement is an agreement between parties expecting to marry which sets out how they intend assets to be treated if the marriage later ends in divorce.

In England and Wales, Pre-Nuptial Agreements are not legally binding, but where certain provisions are made and the court approved guidance is followed, the courts increasingly are giving them significant weight and upholding their terms as part of a final financial order on divorce.

Pre-Nuptial Agreements are best utilised in instances where families are making substantial gifts as these agreements can provide reassurance that the funds are intended to remain separate property rather than part of the shared marital assets.

How to integrate relationship planning into your inheritance tax planning strategy?

If you’re considering making a gift, then it’s worth thinking about relationship planning at the same time.

If the gift is being used to buy a house then, in practice, a Declaration of Trust is often prepared by the solicitor acting on the property purchase and signed at the same time as the property is bought. It records how much each party has contributed and how the sale proceeds should be divided in the future.

Some other practical steps include:

• Clarifying whether the transfer is a gift or a loan and then ensuring it is documented appropriately
• Discussing a Declaration of Trust where a property is being purchased jointly with both parties( some families worry that raising this topic may feel uncomfortable. However, framing it as part of sensible financial planning – particularly where parents are contributing a significant sum – can help ensure that everyone’s expectations are clear from the outset.)
• Encouraging the use of a Pre-Nuptial Agreement if marriage is anticipated; and
• Ensuring that all parties receive independent legal advice so that arrangements are robust and less likely to be challenged later.

Whilst these steps do not eliminate all legal uncertainty, they significantly strengthen the likelihood that the family’s intentions will be respected and implemented.

Taking advice early can help ensure that a gift intended to support your child continues to benefit them in the future, whatever life may bring.

For more details on how Alex or one of the team at Holmes & Hill can support your financial plans with specialist legal advice, visit holmes-hills.co.uk