How do you determine if funds between family members is a loan or a gift upon divorce?
In financial remedy proceedings, there is a concept of ‘hard’ and ‘soft’ loans.
For example, where a husband and wife are divorcing, and the wife’s parents have given the parties money towards the purchase of the family home, the wife may assert that this was a loan and is expected to be repaid, thereby falling outside the ‘matrimonial pot’. That money should be set aside and given back to her parents. The husband may say it was a gift, or if it was a loan, it is a soft one, arguing that the parents never really expected it to be repaid.
In the recent case P v Q (Financial Remedies)  EWFC B9 His Honour Judge Hess explained that the case law does not provide any hard and fast test to determine whether the loan is ‘hard’ or ‘soft’. He helpfully outlines a non-exhaustive list of factors to consider when trying to determine whether there is a real repayment obligation.
- The obligation is to a finance company.
- The terms of the obligation have the feel of a normal commercial arrangement.
- There’s a written agreement.
- There is a written demand for payment or threat of litigation and possible intervention of the lender in the financial proceedings.
- No delay in enforcing the loan.
- The amount of money means the lender is likely to expect repayment.
- From a friend or family member with whom the borrower is on good terms. The lender is unlikely to want the borrower to suffer hardship.
- An informal arrangement, the terms of which do not have the ‘feel’ of a normal commercial arrangement.
- There’s been no written demand for payment despite the due date having passed.
- The amount of money means the lender is more likely to waive repayment. However, this is not decisive as there are examples in cases where large amounts of money were treated as ‘soft’ loans.
These are important factors to consider when receiving large amounts of money from a friend or family member. Within financial proceedings, the circumstances of these types of transfers will be scrutinised to assess whether it is really a loan or in reality a gift.
“Once a judge has decided that a contractually binding obligation by a party to the marriage towards a third party exists, the court may properly wish to go on to consider whether the obligation is in the category of a hard obligation or loan, in which case it should appear on the judges’ computation table, or it is in the category of a soft obligation or loan, in which case the judge may decide as an exercise of discretion to leave it out of the computation table.” (https://www.bailii.org/ew/cases/EWFC/OJ/2022/B9.html)
The content of this page is a summary of the law in force at the date of publication and is not exhaustive, nor does it contain definitive advice. Specialist legal advice should be sought in relation to any queries that may arise.
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