What is the difference between a gift and a loan?
In determining how assets will be distributed upon a divorce, a court will first need to establish whether any advancement of funds would be considered as a ‘gift’ or a ‘loan’. In determining this, the court is likely to look at whether there was an intention to ‘gift’ meaning that they were not seeking for it be returned. If a loan is determined to be a gift, then it could fall under the assets available for distribution between the parties.
How does the court distinguish between hard and soft loans?
In the case of P v Q [2022] HHJ Hess provided a list of factors distinguishing between a ‘hard’ and ‘soft’ loan.
Hard loans
- An obligation to a finance company
- The terms of the obligation has the feel of a normal commercial arrangement
- An obligation arising out of a written agreement
- A demand for payment and threat of litigation in the event of no payment
- An obligation that a creditor is unlikely to waive
Soft loans
- An obligation to a family member or a friend with whom the creditor is unlikely to want the debtor to suffer hardship
- An informal arrangement
- No demand(s) for payment
- A delay in enforcing the obligation
- An amount of money which the creditor is likely to waive
How can you protect your money?
It is important to give careful consideration when advancing funds, particularly if the advancement is intending to be a loan. The family member or friend seeking to loan the funds and the individual receiving the benefit of the loan should each respectively seek independent legal advice, ensuring the terms of the arrangement are written and the repayment terms are made clear. This can help alleviate any uncertainty surrounding as to whether the funds are repayable, otherwise, they could be considered as a gift.
If a family member or friend advances monies to fund the purchase of a property, consideration should be given to enter into a Deed of Trust. This can help ensure these funds are protected and repaid in the event of divorce.
A carefully well drafted pre-nuptial agreement can preserve and protect assets so that they are less likely to be treated as matrimonial property and therefore available for distribution between the parties.
How can our Family & Divorce lawyers help?
If you have any questions dealing with gifts and loans and how they are treated on divorce or any other concerns you may have regarding divorce or separation, do not hesitate to contact our family & divorce lawyers on 0207 228 0017 or via the submission form below.
Contact our property team today to discuss any of the above in more detail by submitting the form below.
"*" indicates required fields
