Property ownership and Children – recognising the financial investment of others

06 January 2022

We catch up with Tim Bennett, Legal Director at Enable Law, who talks us through the types of situations and challenges that a family may face as their Child grows up.

Property ownership and Children – recognising the financial investment of others

06 January 2022

We catch up with Tim Bennett, Legal Director at Enable Law, who talks us through the types of situations and challenges that a family may face as their Child grows up.

Family with siblings

Introduction

The legal ownership of the ‘Family Home’ of a Child who has received a Personal Injury award can sometimes be complex and may need to change overtime. In this article we consider the types of situations and challenges that a family may face as their Child grows up, as well as the impact of the changing needs of the wider family. These changes can create practical challenges for the family (i.e. in dealing with the physical alterations that are required to a property where it is not fit for purpose) as well as legal challenges for a family and a ‘Property and Affairs’ Deputy alike (i.e. how will they be funded / who should have an equitable ‘interest’ in the property and how should it be defined / is retrospective action needed). Reassuringly, these issues can be significantly overcome with regular dialogue between family and Property and Affairs Deputy who can help provide guidance and advice. Where parent and Property and Affairs Deputy are one in the same, timely advice from a trusted legal professional can pay dividends. This article is written from the perspective of a separate (professional) Property and Affairs Deputy but the principles are the same regardless.

Although in most cases forward planning is preferable (and often easier) nevertheless it is still possible to readdress most ownership issues that arise at a later stage. Although aimed at parents, the content is equally applicable to others who may be planning to or, or who may have financially contributed towards the cost of capital works to a Family Home owned by a Child.

The background

As many parents will be aware, when a property is purchased as part of their Child’s Personal Injury Settlement it is financed as part of a damages award and then held ‘on trust’ for them for their lifetime. The purpose is to provide suitable accommodation for their Child’s lifetime, both now and into the future. This may include carers accommodation as well as suitable accommodation for the Child’s parents and siblings. A well designed property will be adaptable as their Child moves from childhood into adolescence, and on into adulthood and may allow for staged adaptation and alteration over many years. It may (or indeed may not) include the ability for independent (supported) accommodation, separate from the remainder of the home so as to provide greater independence from their family.

Expenditure on the ‘Family Home’

Building works, further adaptation, maintenance and home improvement works may all, on occasion, be funded by others living at the Family Home (usually mum and dad). This can be for several entirely logical reasons. For example, the works might be primarily for the use and benefit of the wider family. Or perhaps further adaptation may be necessary but settlement funds may not be sufficient to cover the whole cost. There could also be a cross-over insofar as the capital works benefit both Child and their wider family. In truth, the reasons why capital works might be funded by others is vast and very often a practical solution to a practical problem. Once funding, Planning Permission, Building Regulations, surveying and other practical issues are all addressed, there may appear no logical reason why the works should not progress. A pause to assess the legal and equitable ownership of the Family Home (set against the expectation of these who are providing the funds) is advisable here. Put simply, do all parties understand and accept ‘who will own what’ upon completion of the works if the Family Home is sold or disposed of in the future.

The ‘default’ position in law

If a property has been purchased from the Personal Injury settlement (and held on trust for the Child) then upon sale, the whole of the proceeds will be held for the Child absolutely. Whilst under the age of 18 the property will be held in the name of others (usually the financial Deputy) before being transferred into the Child’s name at age 18. This changes nothing since both pre/post age 18 the equity in the property belongs to the Child, regardless of any contributions made by others. Indeed, anything that happens in the intervening years between purchase and sale (whether pre/post 18) is not taken into account. Essentially the contributions made by others to the Family Home will all be lost. This can mean that further adaptions / maintenance / capital improvements – indeed any financial contribution to the property all go unrecorded.

By way of example:

  • Purchase and adaptation price in 2005 = £500,000
  • Property improvements (all by parents) = £200,000
  • Growth = £500,000
  • Current value = £1,200,000

Distribution under ‘default’ position

  • Parents = £0.00
  • Child = £1,200,000

In this scenario, the parents neither benefit from their capital contribution nor the increase in the capital value of the property. Essentially, monies invested in a property where the ‘default’ position applies are treated as gifts (and may also have tax consequences for the giver).

What ‘capital works’ to the Family Home should be considered?

Essentially, anything that has a capital value, although we might categorise these in three ways:

  1. Maintenance                 e.g. replacing the roof / windows / insulation / heating etc.
  2. Adaptation                    e.g. changes to living accommodation / installation of therapy or hydrotherapy room facilities / carers accommodation
  3. Other improvement       e.g. extension / kitchen / bathrooms etc.

We are therefore talking about any capital work to the property that has a financial cost (whether or not this ultimately translates to an increase in the market value of the property).

Retrospectively changing equitable ownership in the Family Home

A Declaration of Trust (i.e. a legal document recording parties respective interests in the Family Home and what they will receive upon sale) resolves this. Where circumstances allow, this is signed in advance of monies being spent (see below). If not, it can prepared retrospectively to reflect who owns what share of the Family Home. Full disclosure is needed of the following information:

  1. financial contributions made – payment amounts
  2. key dates – of works and payments
  3. evidence and records of the works – plans / permissions / reports and surveys / building schedules / guarantees
  4. the rationale for the works – any expert report(s)
  5. valuations (ideally before and after the works have been completed) – usually at least three written market valuations on each occasion

Note – an application will be needed to the Court of Protection to approve the Declaration of Trust. This is evidence based and the more complete the picture provided to the Court the greater the likelihood will be that the Declaration of Trust will be approved. The Court will set a high threshold against which to measure whether a Declaration of Trust is appropriate and in the Child’s best interests. Applicants must therefore ensure they compile together as much evidence as they can. This should include addressing the impact that not authorising the Declaration of Trust will have on the individual(s) providing the finance for the capital works.

Other problems?

A Declaration of Trust will not (immediately) be possible where there are problems with either Planning Permission or Building Regulations outstanding. Indeed, as you would expect, the Court of Protection will expect to see evidence that any capital works have been completed in accordance with whatever rules apply before they will consider retrospective approval of a Declaration of Trust. If the capital works are ostensibly for the Child’s benefit, further problems may exist where there is no current expert evidence available to support them. An expert report may also be required to provide the rationale for the works.

The benefit of the capital works may be neutral insofar as they do not enhance the Child’s life directly but instead help to support the wider family. This might reasonably include the construction of a ‘granny annex’ to enable family members (including potentially parents) to live close at hand.  In such circumstances it will be important to define equitable ownership where the legal title to the Family Home has not been separated into two titles by the Land Registry (despite in reality functioning as two independent properties). In truth, it is highly unlikely that this situation would arise retrospectively but does warrant comment as a example of the need to ensure a Declaration of Trust is reflective of initial and/or subsequent contributions made by others, so as to prevent against unexpected ‘gifting’ of equity which might impact upon the distribution of someone’s estate.

What else can be done (retrospectively)?

Provided that 1) the evidence is available (see above) 2) it is affordable (liaise with the Property and Affairs Deputy here) AND 3) it is in the Child’s best interests, it may be possible to request the Court of Protection authorise repayment by the Property and Affairs Deputy for the cost of the capital works. This avoids the need for a Declaration of Trust altogether and leaves sole legal ownership and equitable interest in the Family Home with the Child. Often this is a far simpler resolution and reflects the original intention that the Family Home remains in their name. Whether this is possible will be dependent upon the facts. For example, capital works to improve the Family Home for the Child’s benefit or maintain it’s fabric may be more likely to succeed over capital works that merely improve it overall or increase it’s value. That is not to say that the latter will be unsuccessful, but that the facts (including affordability) will be crucial here. Evidence in the form of the Child’s annual budget / affordability, lifespan and impact analysis from an Independent Financial Advisor will be important.

Avoiding the problem

If at the time of purchase and adaptation, the ‘default’ position is not appropriate then agreeing the terms of a Declaration of Trust at the outset will be the simplest option. This may (amongst other points) set out:

  1. the initial contributions others make
  2. deal with subsequent contributions
  3. the basis upon which the Family Home will be valued (both now and in the future)

I simplify a little, but the point is that the terms can be agreed in advance with the Property and Affairs Deputy. Again, this will require the approval of the Court of Protection before funds are invested. It is worthwhile noting here the timescale to obtain Court approval. Typically, this is around 9 months although it could be longer depending upon the complexity of the situation. Unfortunately in this scenario it may be difficult to progress with the purchase / adaptation works without Court approval unless 1) the Child’s funds allow AND 2) the Deputy and family alike are comfortable with the ‘risk’ that the Court may not ultimately approve the Declaration of Trust – resulting in the Family Home remaining in the sole equitable ownership of the Child.

Practical advice

In advance of the initial purchase / build / adaptation – determine as soon as possible whether the Client will be funding the whole of the project. If not, establish precisely what part of the project will be partially financed by others. For example, this might mean defining and separating the cost of the additional accommodation for the wider family. Likely the Property and Affairs Deputy will instruct an expert ‘Trust Law’ solicitor to prepare a draft Declaration of Trust and give you the opportunity to take independent legal advice about the proposed ‘split’ of the equitable interest in the Family Home. Note – independent legal advice is a must since it may also reveal considerations that you had not thought through in relation to your own financial planning (about which the Property and Affairs Deputy would know nothing about).

In advance of subsequent capital works – determine whether there is a Declaration of Trust and what this says about work to the Family Home in the future. Speak with the Property and Affairs Deputy and discuss proposals. Will any existing Declaration of Trust be sufficient? Please do not assume that it will be as the precise scenario may not have been envisaged when it was signed. Further, there will almost certainly be a need for approval from the Court of Protection before any works commence.

If retrospective authority is needed – full disclosure as soon as the issue arises is the best way of ensuring the respective financial interests of the Child and the contributing parties are appropriately defined and protected. Unfortunately little will be gained by not disclosing any such contributions. A timely meeting with the Property and Affairs Deputy and (if necessary) an application to the Court of Protection will help ensure supporting evidence remains available.

And finally

Ultimately, what is important is ensuring everyone who has financially contributed knows and understands how upon sale or disposal of the Family Home the net proceeds are to be held and distributed. Even where the intention is that funds should go to the Child, it’s crucial that this is recorded by the Property and Affairs Deputy and that all parties have the opportunity to take independent legal advice (whether or not a Declaration of Trust is prepared).

Looking a little wider (and of particular relevance to parents with other children) is the matter of their own estate planning. A Declaration of Trust therefore not only protects and defines the Child’s interest but also ensures that parents are able to effectively plan their own affairs, taking into account whatever financial contribution they may have made towards the Family Home and preventing the risk of unintended gifting previously mentioned.

In short, it is always worthwhile revisiting the subject of the equitable ownership of the Family Home whenever any capital works (large or small) are being considered. There is nothing whatsoever to be lost and much to be gained by eliminating unnecessary ambiguity, and defining and protecting the financial contributions of all parties. Indeed, it is action that the Office of the Public Guardian would expect a Property and Affairs Deputy to take as in the best interests of the Child.

Enable Law are a specialist practice dealing with Mental Capacity law and the Court of Protection. We have extensive experience both acting as a professional Deputy and acting for lay Deputies alike.

This article was written by Tim Bennett. Tim is a Legal Director at Enable Law, specialising in mental capacity.

 

Although we are grateful to receive support from a number of corporate sponsors, we do not endorse any specific organisation. If you are seeking legal advice, we encourage you to contact a number of experienced solicitors for an initial discussion before selecting a firm.

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