Nearly half of first-time home buyers in the UK now need extra funding from parents. Knowing how to protect and/or recover loans or contributions is really important if couples subsequently separate and divorce, because the starting point of any divorce will be a fifty-fifty split of assets.
What is the difference between a loan and a gift?
It can sometimes be difficult to prove that money was in fact a loan rather than a gift. It is all too common for someone to whom money has been lent to turn around and claim that it was never the intention to be paid back but instead was intended to be a gift. It is essential to be very clear about the basis on which money is given, whether for a home deposit or for anything else, since it will be treated differently in law depending on whether it is classed as a gift or a loan.
A gift must be given voluntarily with no benefit to the giver, and it should be clear that the intention was that it should never be returned or repaid. A loan on the other hand is treated as a liability and there is an obligation that it will be repaid in the future.
Parents should be aware that an outright gift, be it money, jewellery, a car, property, or anything else, cannot be recovered by the giver in the event of their child’s divorce. It is treated as part of the matrimonial pot, which is divided up between the parties should they separate or divorce.
A pre-nuptial agreement is one way of protecting a gift or money given before marriage. Money, such as a hefty house deposit, if given after marriage and only for the intention of benefiting one half of the couple, is better being given as a loan.
However, loans may have unintended consequences. Money loaned, for example to someone for the purchase of a property might influence how much they can borrow from a bank, or the terms of the mortgage offered.
How are gifts and loans considered when a marriage ends in divorce?
When a marriage or partnership ends there is nearly always a disagreement about how the finances and assets should be split. If money has been given to the couple from one side of the family, for example the husband’s parents, it is natural that he will almost always want to argue that the money he received from his parents was a loan and that he has an obligation to repay it at some point. The wife, or ex-partner will, in turn, want to argue it was a gift and forms part of the matrimonial assets. How do you tell which it was and to whom it was given?
The court will look at all the circumstances and reach its own decision regarding whether or not financial help should be classified as a gift or loan.
How does the court distinguish between hard and soft loans?
When money is lent to a close family member, or even a good friend, it is often provided on the understanding that there is no immediate rush for it to be repaid, nor are there any terms or conditions to the loan. Lawyers frequently refer to this type of loan as a ‘soft loan’ as opposed to a ‘hard loan’ that you would normally agree to with a bank or building society.
In court, when considering how the assets and finances should be divided in a financial proceeding, a judge may deem a soft loan to be actually a gift and therefore part of the assets of the couple. A 2022 case provides a list of factors that the court will use to decide whether the loan is hard or soft.
Factors that point to a soft loan:
- The obligation is to a friend or close family member
- The loan is informal
- There has been no written demand for repayment
Factors that point towards a hard loan:
- The obligation is to a finance company such as a bank or credit card company
- The terms of the loan have the feel of a normal commercial arrangement
- There is a written agreement in place
- There is a written demand for payment
We go into more detail in our post here: ‘Hard or Soft Divorce Loans’
Conclusion
It may seem like a difficult or unfriendly way to go about things, but any money provided to another should be provided as a formal loan with appropriate documentation in place so that, if necessary, it can be used to prove the money was given as a loan. This ensures that all parties are on the same page and that there are unlikely to be hidden legal consequences down the track. It also means it will not be added to the matrimonial assets.
Contact
Paradigm Family Law have a team of experienced and highly recommended divorce lawyers to help guide you through the process of divorce, just waiting to hear from you.
If you would like more details on this or want to discuss your family law matter, please do not hesitate to contact James, Frank, or Evelyn. Paradigm Family Law offers a free initial consultation with a top rated divorce lawyer and our fixed fee solutions cover financial proceedings from start to finish. You can call us on 01904 217225 or email us to [email protected].
