UK: A Warning To Generous Parents

Last Updated: 15 June 2010

In this tough economic climate when our children are finding it hard to put their foot on the property ladder for the first time, it may be tempting to consider helping them out. There may also be sound tax planning reasons that you might want to pass on some of your wealth to your children now rather than waiting until you die. However, you should think very carefully before doing so about how the gift or benefit is to be structured to ensure that the help benefits your child and not his or her spouse, civil partner or co-habitee. For simplicity we will deal with financial provision on divorce but the same considerations apply to financial provision on dissolution of a civil partnership. We will also address the issue of co-habitations.

In terms of the Family Law (Scotland) Act 1985, one of the five principles the Court has to apply when making financial provision on divorce is the fair sharing of the net value of matrimonial property between the parties to a marriage.

Matrimonial property is defined as that belonging to the parties (either collectively or individually) at the relevant date (the date of separation); and which, other than by way of gift of succession from a third party, was acquired:

  • Before the marriage for use by them as a family home; or
  • During the marriage but before the relevant date.

It is complacent to think that if you gift your child money before or even during marriage that this gift is "safe" from the clutches of an errant spouse, simply because of the fact that it is a gift from you as a "third party".

If your child uses the gift of money or sells the asset to buy something else during the marriage - or even to buy a house before marriage for use as a family home with his or her partner and they subsequently marry - then by definition that asset or house is matrimonial property and subject to the principal of fair sharing. There is a presumption that fair sharing is equal sharing, although this can be rebutted if "special circumstances" apply. A common special circumstances argument is that known as a "source of funds" argument. This is where the funds or assets used to buy the matrimonial property were not derived from income or efforts of the parties during the marriage, i.e. the money or the asset came from you originally. A court has very wide discretion when deciding whether to depart from the equal sharing principle, particularly when the argument is centred on the family home - and is even more so when the family home is used to provide accommodation for children. The errant ex-spouse may run off with half the money you gave your child, or a proportion of it.

A simple remedy is to record the gift in a written agreement with your child. The agreement can also detail any conditions attached to the gift. If the child is married at that time their spouse should also be party to that agreement, confirming that the gift was made to the child alone and notwithstanding the fact that the gifted money may be used to purchase an asset which may become matrimonial property the value of the sums gifted shall be ring-fenced for the benefit of your child and shall not treated as matrimonial property if the relationship does not survive. There are other means of protecting your gift to your child but it is wise to take advice if this is something that is being contemplated.

A gift to your child may be more subtle than cash. Recent examples have included:

  • A sale of a house to a child at a discount
  • Gift or inheritance of business interests, part of which are then sold to fund the purchase of other assets
  • Transfer of a former local authority house purchased at a discount.

Please also be very wary if your accountant advises you to transfer an asset to your child and his or her spouse "for tax reasons". There is a real risk that a court will regard this as a gift to your child and a gift of equal value to the spouse. Whether the court will accept tax planning considerations as a special circumstance is doubtful, but any doubt can be removed if a suitable agreement is put in place before the transfer.

And finally, a gift of money to the child to help him buy a flat with his girlfriend could see the future ex-girlfriend run off with half your money if the title is put in joint names. Again, a written agreement to regulate the treatment of your gift to your child, if the relationship breaks down, could avoid a lot of future heartache and expense.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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