Nearly half of first-time homebuyers in the UK now require additional funding from their parents. Understanding how to protect and/or recover loans or contributions is crucial if couples later separate or divorce, as the starting point for dividing assets in any divorce is typically a fifty-fifty split.
What is the Difference Between a Loan and a Gift?
It can sometimes be challenging to prove whether money was given as a loan or a gift. It is all too common for someone who has received money to later claim that it was never intended to be repaid but rather was a gift. It is essential to clarify the basis on which money is given—whether for a home deposit or any other purpose—since it will be treated differently under the law depending on whether it is classified as a gift or a loan.
A gift must be given voluntarily, without any benefit to the giver, and it must be clear that the intention was for it to never be repaid. On the other hand, a loan is treated as a liability, with an obligation to repay it in the future.
Parents should be aware that an outright gift—whether money, jewellery, a car, property, or anything else—cannot be recovered by the giver in the event of their child’s divorce. Such a gift is considered part of the matrimonial assets, which will be divided between the parties should they separate or divorce.
A pre-nuptial agreement is one way to protect a gift or money given before marriage. However, money given after marriage—such as a substantial house deposit, especially if it is intended to benefit only one partner—should be provided as a loan to avoid complications.
It is important to note that loans may have unintended consequences. For example, money loaned to someone for the purchase of property might influence how much they can borrow from a bank or affect the terms of the mortgage offered.
How are Gifts and Loans Considered When a Marriage Ends in Divorce?
When a marriage or civil partnership ends, there is nearly always a dispute regarding how finances and assets should be divided. If money has been provided by one side of the family—for example, from the husband’s parents—it is natural that he may wish to argue that the money he received was a loan and that he is obligated to repay it. Conversely, the wife, or ex-partner, may claim that it was a gift, thus forming part of the matrimonial assets.
How can the court determine whether the money was a loan or a gift, and to whom it was given?
The court will consider all circumstances and make a determination as to whether financial assistance should be classified as a gift or a loan.
How Does the Court Distinguish Between Hard and Soft Loans?
When money is lent to a close family member or a good friend, it is often provided with the understanding that there is no immediate obligation for repayment, nor are there any formal terms or conditions attached. Lawyers often refer to this type of loan as a ‘soft loan’, as opposed to a ‘hard loan’, which would be the sort of loan normally agreed with a bank or building society.
In financial proceedings, a judge may determine that a soft loan should be classified as a gift, and therefore included as part of the matrimonial assets. A 2022 case set out several factors that the court will consider when deciding whether a loan is a hard loan or a soft loan.
Factors Indicating 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 Indicating a Hard Loan:
- The obligation is to a finance company, such as a bank or credit card company.
- The terms of the loan resemble a standard commercial arrangement.
- There is a written agreement in place.
- There is a written demand for repayment.
Conclusion
While it may seem overly formal or even unfriendly, any money provided to another should be structured as a formal loan, with appropriate documentation in place. This ensures that, if necessary, the money can be proven to have been given as a loan rather than a gift. Doing so not only ensures that all parties are clear on the arrangement but also prevents any hidden legal consequences in the future. Additionally, it ensures that the money will not be added to the matrimonial assets.
If you or someone you know wants more information or needs help or advice, please contact us on 020 3858 8020 or email [email protected].