The well-known ‘Bank of Mum and Dad’ is bigger than expected, lending an estimated £300 million to help over 18,500 young Scots get on the housing ladder this year, according to a report this week.

Young house-buyers will need family support in 24per cent of all transactions, with an average contribution of almost £16,000, making ‘BoMaD’ one of the leading mortgage banks in the Scottish market, says Legal & General.

But parents and grandparents who pass down wealth, to help counter rising property values and expensive rents, need to be aware of their own tax and legal issues, and borrowers need to tell their other lenders.

Over three-quarters of BoMaD purchases will be supported by parents, with the remainder involving grandparents and other family members or friends. Half of contributions are gifts, one in eight are interest-free loans, one in 25 are loans with interest.

The average contribution amounted to 7.6per cent of the house purchase price, or over three-quarters of typical 10per cent deposit.

This represents over a third of the average BoMaD household net wealth in Scotland (excluding property assets). In London, this figure has already reached 51per cent of the average household net wealth

The spiralling cost of housing in London meanwhile means parents or grandparents elsewhere in the UK supporting children buying in the capital are devoting an average 64per cent of their own household wealth to the project.

Meanwhile homebuyers need to be aware of the pitfalls when they tap the family bank for cash.

Amanda Frenz, partner in the residential property department at Tayside law firm Miller Hendry, says: “There is often a belief that borrowing from your loved ones is a simple, even casual, solution. But, especially given the popularity of this kind of borrowing, it is imperative that people do it right.”

Lenders should be notified of any gifted deposits at the time of inquiring about a mortgage. Lenders are usually happy to approve of gifted deposits as long as they are outright gifts and non-refundable, and as long as no other party has an interest in the property.

Sometimes a letter from the donor of the gift may be asked for. Lenders are less likely to approve loans from parents or grandparents, and will often scrutinise those in more detail, with some lenders only prepared to accept gifts from family members. Further, there is often a stipulation that donors are UK residents with funds held in a UK bank or building society.

Buy-to-let purchases may not be approved.

Ms Frenz says: “While we are all for family members helping each other out when it's needed, we would urge borrowers and donors to have all the facts at their fingertips before they enter into these sorts of financial arrangements.”

Alison Hawes, family law expert at UK firm Irwin Mitchell, says parents need to protect their investments.

“Imagine a house bought for a daughter by her parents, that her boyfriend moves in to. There is no clear agreement but he takes over the loan repayments to her mum and dad because he has good job and she gets made redundant.

“You can ask the partner who moves into a house you own to sign a deed of surrender meaning that even if they pay the gas bill from time to time, you have a legal document to show that it was never your intention to share the equity in the property.”

Donors should consider taking separate legal advice regarding gifts.

Sean McCann, chartered financial planner at NFU Mutual says: “Making gifts to help out the younger generation can be a very effective way to reduce any future inheritance tax bill. While you normally need to survive seven years for a gift to be free of IHT, there are exemptions.

“You can give away up to £3000 each tax year free of IHT, if you haven’t used the previous year you can go back one year and get it, allowing you to give away £6000 immediately free of IHT.”

Mr McCann says a valuable but little-known exemption is ‘gifts out of normal expenditure’. It allows you to give away an unlimited amount of ‘surplus’ income, exempt from IHT provided the gifts are regular and do not impact on your normal standard of living.

“After making the gifts, you must be left with enough income to maintain your normal standard of living. The exemption will not be available if you have made gifts out of income and then have to resort to capital to live on. The exemption is not given automatically, and needs to be claimed after death.”

Mr Mc Cann adds: “Keeping records of your income, expenditure and evidence that you intended the gifts to be regular will make it easier for your family to make a claim.”

Nigel Wilson, chief executive of Legal & General, says: “People will always want to help family members – it is a natural thing to do. Relying so heavily on the Bank of Mum and Dad however risks increasing inequality as many young people today are not lucky enough to be able to access parental support when buying a home, or can’t afford to buy even with parental help.

“We have a supply-side problem in housing – we are simply not building enough houses. We need to build more, especially as the Bank of Mum and Dad could soon start to experience a funding crisis of its own.”