Parental Contributions to Children's Businesses - Legal Certainty is Priceless

It is commonplace for parents to put their hands in their pockets to help their children set up in business. As a High Court ruling in a bitterly contested inheritance case showed, however, a failure to formally document the precise legal basis on which such contributions are made is to store up trouble for the future.

By his final will, a businessman left his estate to provide an income for his third wife. On her death, his estate was to be divided between four of his children. Nothing was bequeathed to a fifth child – a son – on the basis that he had already been fully provided for during the businessman's lifetime.

Following the businessman's death, his wife launched proceedings, arguing that the son held a 45 per cent shareholding in a valuable company on trust for his father's estate. She asserted that her husband had contributed financially to establishing the son's company and that there was a gentleman's agreement between them that he would, in return, be entitled to that shareholding.

Ruling on the case, the Court found that the businessman had contributed £295,000 to the son's venture, initially as a loan. There was never a firm, clear or specific agreement between them that he would receive shares in the company to reflect his contribution and the son had made no express promise to that effect.

The businessman may later have come to regret not having insisted on becoming a shareholder in that he believed that the thriving company was worth about £5 million. Prior to his death, however, the Court found on the evidence that he had decided to treat his investment as a gift by way of advance inheritance to the son. The wife's claim in respect of the shares was dismissed.