Today more and more parents are helping their children get onto the property ladder, pay for a wedding, or just make them a little more comfortable.  However, what happens to a family loan in a divorce or separation?

What is a family loan?

A family loan is a sum of money lent by one family member or close relative to another. 

It is almost always an informal agreement and rarely supported by any formal documentation.  This means the terms and conditions of the loan – for example the time over which the repayment needs to be made and the interest rate, if there is one – are usually equally informal and will remain the preserve of those involved.

In these challenging times family loans are a good option for those finding it tricky to obtain loans or a mortgage from more traditional sources.  However, both parties should always be careful when agreeing terms as nobody knows for sure if changes to their circumstances could be just around the corner. 

Arguably the most likely change is the recipients choose to divorce.

Family loans and divorce

As family loans are informal arrangements, there is immediately an issue for should those lending the money decide they want to recover their loans in the future if the recipients do decide to part.

When the couple makes their applications for the financial order in their divorce proceedings, the court will draw a clear distinction between monies that have been gifted to the couple during the marriage and monies which have been loaned to the couple.  The difference between a gift and a loan is that when money is gifted, the lender has no expectation the money will be repaid.  With a loan, there is that expectation even if the terms are, as we’ve said, loosely defined.

That said, it’s important to note that if the gift involved a large amount of money, it could be classed as a significant ‘contribution’ to the spouse whose family gifted the amount.  This means the gift should be considered when it comes to making the financial order. 

In most cases any financial gifts will be divided in accordance with their future needs along with all their other assets.

When it cannot be proven that the payment was a gift, the payment will probably be viewed as a loan.  If the court believes it was a loan and that loan is repayable, they may order the parties to repay the loan from the matrimonial assets so that the remaining assets can be divided between them. 

Should there still be disagreement over whether the money is a loan or a gift, this is the point at which a dispute could arise.  If this happens the court will need to see evidence in order to make a decision on the providence of the gift/loan.  This evidence could be:

  • A written loan agreement
  • Written communication including the terms of repayment
  • Written evidence repayments have been made
  • Written evidence of any discussions relating to the loan/terms of the loan between the lender and recipients
  • Evidence there was an expectation the loan would be repaid

Speaking in very general terms, if this evidence is not forthcoming, the court is likely to view the money as a gift and, therefore, not repayable.

If you or a client are involved in a case involving family loans or financial gifts and you would like to discuss the situation and possible options in confidence with one of your experienced family barristers, please contact us today.

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