“Borrowing” money from Mum and Dad – is it gift or a loan?

A common issue that arises in divorce financial proceedings is whether monies advanced to one of the parties by their parents is to be treated as a gift or a loan.  If it is to be treated as a gift, the money will form a part of the “pot” of resources available to be split between the parties to meet their respective needs.  If it is to be treated as a loan, the court is likely to deal with it as a liability which needs to be repaid in line with the terms of the agreement.

The first question is whether the transaction is a loan which could, in theory, be enforced, as distinct from a gift where there was no possibility of it ever being repaid.  The second is, if it is a loan, is it a “hard loan” that should be treated as a liability in the calculation of the “matrimonial pot”.   The key factor is, what is the likelihood that the obligation to repay will be enforced?

Although there are no hard and fast criteria as to whether this type of loan will fall into one category or another, in a recent case, the court provided a list of factors to be considered when determining whether monies advanced by family were gifts or loans.[1]

Factors that indicate a hard loan include:

• Circumstances where the obligation is to a finance company.
• Terms with the feel of a commercial arrangement.
• Steps have been taken to request repayment i.e. there is a written demand for payment, threatened or actual litigation, or intervention in the financial remedy proceedings.
• There has not been a delay in enforcing the obligation.
• the amount of money is such that it is unlikely that the obligation to repay will be waived.

Factors that indicate a soft loan include:

• Circumstances where the obligation is to a friend or family member with whom the debtor remains on good terms and who is unlikely to want the debtor to suffer hardship.
• The obligation has arisen informally and there has been no written demand for payment despite the due date having passed.
• There has been a delay in enforcing the obligation.
• The amount of money is such that it would be more likely for the creditor to waive the obligation in whole or part.

If you are considering borrowing money from a friend of family member, it is important that you are clear on the terms of the loan in order to avoid the court categorising the advance of money contrary to your intentions in the event of divorce.

If you intend for the loan to have the status of a hard loan that will be repaid you should consider the following steps:

1. ensure that all parties (including your spouse) are clear of the status of the loan and the repayment terms;
2. confirm the terms of the loan in writing – an email will suffice; and
3. ensure that it is referred to consistently as a loan in all communications.

If you are experiencing a break down of your marriage and are concerned about any of the issues raised in this article, speak to one of our family law experts.

[1] P v Q (Financial Remedies) [2022] EWFC B9

Speak to our Family Law specialists

If you have any questions around this, please do contact the Family Team at IBB. To contact the team please email familylaw@ibblaw.co.uk or call 03456 381 381.