Susan Midha, a partner at law firm Adams & Remers, discusses case studies illustrating the potential pitfalls facing HNW women contemplating marriage or cohabitation (this is the third case study in a series of three, to view the preceding two click here).

Marianna is from a wealthy family and is in her early 20s. She is based in London and works for a bank, and her parents have decided to buy her a property in the city for £400,000 ($636,000). Marianna has a boyfriend, Nick, and she is keen they move into the property together but she wants to protect her parents’ investment and her nest egg.

Buying your first home, particularly setting up house with someone, can be very exciting and challenging.  So many decisions to make, whether it’s about the location or about the colour of the new carpets.  But it’s important that all that busyness does not push out some important considerations of how you own the property.

For Marianna, as the funds are coming from her parents, she has two broad options. She can buy the property in her own name with either an outright gift or a loan from her parents; or she may wish to consider asking them to buy the property through a trust.

A trust is where the legal ownership of the property (shown as the owners at the Land Registry) is not in the same hands as the right to benefit from the proceeds of sale of the property or to occupy it.

The legal owners (the trustees) can be Marianna and her parents, and Marianna would be one of the beneficiaries (along with, say, her future children and grandchildren etc.) and she would have the right to occupy the property.

If the flat were sold, the proceeds of the sale would belong to the trust, and the “rules” of the trust, contained in the trust deed, or “settlement” as it is often called, would say how they could be used.  Those rules might say that the proceeds could be given to Marianna outright, or re-invested in another property for Marianna to live in, or to take the income from.  Or they could be invested in any other investments (e.g. bonds and stocks) the income of which could be given to Marianna or rolled up.

The advantage of a trust of this nature is that as the property does not belong to Marianna, it would be protected in an event where her assets are taken into account – e.g. bankruptcy, means-tested benefits and possibly even divorce.

Cohabitation concerns

Well, that’s leaping ahead isn’t it, because Marianna’s not yet planning to marry, just live with her boyfriend?  And if you cohabit you don’t get rights to your partner’s property if the relationship or partnership comes to end, do you?

Well, that’s not necessarily the case.  It’s true that the rules that apply to financial provision on divorce (and on the dissolution of a civil partnership) don’t apply to unmarried partners.  But if Marianna were to die after she and Nick had been living together for more than two years, he would have a potential claim against her estate. Her estate would include anything she owns in her own name so if she doesn’t own the flat (because it is in trust) he would not be able to make a claim against it.

That’s all rather dramatic though, and the chances of Marianna and Nick’s relationship coming to an end through death are pretty small compared to the much greater likelihood of them simply deciding to go their separate ways.

A buffer against claims

A trust will help to be a buffer against Nick claiming that he should be regarded, by virtue of his contributions to expenses or repairs etc, as entitled to some of the proceeds of sale.  It will also enable Marianna in those circumstances to distance herself from such arguments – if she were the guilty party, she might feel inclined to a generosity she’d later regret, if she owned the property herself.

So a trust can have both practical and psychological benefits.  But what if it isn’t possible (perhaps because her parents have used up their tax-free trust allowance)?

If Marianna’s parents make a gift to her the funds will fall out of their estate for inheritance tax purposes after seven years.  But the downside is that the funds are wholly Marianna’s for all purposes – bankruptcy, means tested benefits and divorce.  A loan on the other hand, particularly if it is secured on the property, can protect the funds against those eventualities.

If an outright gift is still the preferred option, Marianna might want to consider asking her boyfriend to sign a declaration that his occupation of the property and any financial contribution he makes to the joint living arrangements will not give him a right to live in the property or to share in its proceeds of sale.  This isn’t a panacea but will provide evidence of what their joint intention was when the property was bought and make it more difficult for a successful claim to be brought in the future.

Thinking about these issues is not at all romantic and as the Gaelic New Year’s toast goes  “May your roof never fall in and those under your roof never fall out” but if they do, with a bit of legal housekeeping, then at least it will be clear who owns it. 

This article is not intended to be a full summary of the law and advice should be sought on all issues.