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The Bank of Mum and Dad - Is Money Given to a Spouse by Family a Gift or a Loan?

on Monday, 07 March 2022.

It is very common for people to receive financial assistance from parents and family members throughout their lives. Upon divorce, this can often lead to the question, will the parties be expected to re-pay this money, or will it be treated as a gift?

Why Is the Distinction Between a Loan and a Gift Important?

In financial remedy proceedings, this question is particularly important because how this money is treated impacts the amount of money in the marital pot.

If this payment is treated as a gift, it can be considered as a contribution given to the parties that does not have to be repaid. This money can instead be included in the matrimonial pot and used to meet the parties' needs.

If this payment is treated as a loan, it cannot be considered part of the matrimonial pot and instead will be noted as a liability that must be repaid, much like a loan from a bank.

Is It a Loan or a Gift?

In the recent case of P v Q (Financial Remedies) [2022] EWFC B9, HHJ Hess has summarised the factors to be taken into account when determining whether money given to a party by their family prior to or during marriage should be regarded as a gift or a loan.

The key factor is whether it was likely in reality that the obligation would be enforced.

Factors pointing to a hard loan include:

  • an obligation to a finance company
  • terms with the feel of a normal commercial arrangement
  • obligations arising out of a written agreement
  • a written demand for payment, a threat of litigation or actual litigation, or intervention in the financial remedies proceedings
  • an absence of delay in enforcing the obligation
  • where the amount of money was such that it would be less likely for a creditor to waive the obligation, either wholly or partly

Factors pointing to a soft loan (gift) include:

  • an obligation to a friend or family member with whom the debtor remained on good terms and who was unlikely to want the debtor to suffer hardship
  • an obligation arising informally, with terms that did not have the feel of a normal commercial arrangement
  • no written demand for payment despite a due date having passed
  • delay in enforcing the obligation
  • an amount of money such that it would be more likely for the creditor to waive the obligation, wholly or partly, albeit that the amount involved was not necessarily decisive: there were examples in the authorities of large amounts of money being treated as soft obligations

In this case the court concluded that some factors might fall on one side of the line and others might fall on the other but ultimately it is for the judge to determine the appropriate and fair outcome, looking at all the factors.

What Can We Learn From This?

This case is a reminder that payments given to parties by family members may be considered as a gift if there is not a clear obligation for repayment. If you are receiving or giving money in this context and would like this to be repaid, it is important to ensure that a written agreement is made. However, even then it cannot be guaranteed that this type of payment will be considered a loan rather than a gift and the ultimate discretion is with the court.

If you have any questions about handling finances on divorce please contact a member of our New Enquiries team on 020 7405 1234, or complete the form below.

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