Mortgage deposits often require large sums of money. When a couple buys a property, one may contribute a lot more towards the deposit than the other. What happens if the couple then splits up and moves out?
As part of a series on property and relationship break down, Divorce and Family partner Toby Atkinson and senior associate Sarah Havers explain what would happen in this scenario depending on the couple’s circumstances.
If an unmarried couple buys a property with an unequal deposit (for instance one gives £100k, the other just £10k), what happens if they split up and sell the house?
If they purchased the property as joint tenants, they own the property jointly both legally and beneficially in equal shares. This is irrespective of who contributed what and the source of the funds, and the net proceeds of sale would be divided equally.
If one partner had died and the property was held as joint tenants, their share would have passed automatically to their partner. This would happen even if they had separated (but still owned the house) and even if the deceased partner had tried to make alternative arrangements in their will for their share of the property.
Is there a way the financially stronger party could have protected their deposit?
The alternative, and far better option, for the now-deceased partner would be for them to have bought the house as tenants in common. This means that, although on the face of it they own the property jointly, they can enter into a declaration of trust to record their specific shares in the equity in the property to reflect their respective financial contributions.
On these facts, the declaration of trust could state that the partner who invested £100k was to receive 91% of the net sale proceeds. They could also have specified in their will who should receive their share of the property on death, it would not pass automatically to their partner.
If a parent lends their child money for a deposit, but the child’s partner (not spouse) contributes nothing, how can the parent ensure they get their money back if the couple separates?
The best thing for the parent to do would be to strongly encourage their child and partner to purchase the property as tenants in common and enter into a declaration of trust providing for their child to have a 100% share in the equity. This will ensure that the deposit, and any growth on it, remains their child’s property and the partner cannot make a claim.
A cohabitation agreement would also be advisable, recording how the house was purchased and that the funds were loaned by the parent to their child with the partner holding no interest in it. Provided they are correctly drafted, cohabitation agreements are legally binding contracts which, if necessary, are enforceable by a court. They are very effective and highly recommended.
What if the child and their partner were married?
If the child and their partner were married then the house is generally treated as a marital asset. However, if it was a short, childless marriage and there was a formal loan agreement between the child and their parent (particularly if interest was payable) then it is more likely that the child’s partner would not receive a share of the property, so long as they were able to meet their own needs.
However, the family court can be quite suspicious of inter family loans and often treats them as “soft loans” that will in reality never have to be repaid.
Does it make a difference if the money is a loan or a gift and how can this be set down legally?
Yes to an extent, but the best approach legally, if the parties are not married, is as set out above. If the parties intend to marry, then they should enter into a pre-nuptial agreement to record the position in relation to the house. If they are already married, they could enter into a post nuptial agreement (which would have exactly the same legal effect).
Boiling it all down, the safest way to protect oneself before purchasing a property with a partner is to seek legal advice at the very outset and ensure that everything is documented properly. Prenuptial and cohabitation agreements might seem rather unromantic to many people – it can be difficult to broach this subject with a partner at the same time as deciding to live together or to get married – but they can save a great deal of stress and expense in the long-term. It is important also to note that couples can enter into marital or cohabitation agreements at any time in order to regulate their affairs during their relationship or to record the financial arrangements upon and after separation.
These responses were first provided for an article in Good Housekeeping.
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