- What We Do
- Your Options
- Meet the team
- Join Us
With the cost of living hitting a thirty-year high earlier this year and fuel and energy prices continuing to soar, the pressure on family budgets is having a devastating impact. In the face of such spiralling economic uncertainty, we are frequently seeing clients turning to family and friends for financial help. This is not a new issue in family law however, a key issue for a lot of families we work with is how these advances from family and friends are treated – were they gifts, loans or soft loans?
Whilst the low-interest rates and lack of explicit time constraints may certainly be an attractive feature of familial loans, such advances can often lead to disputes, stress and unnecessary costs during a divorce or separation.
We considered in a previous blog post several ways in which families can reduce the risk of lengthy disagreements to determine the terms on which money was given. In particular, we discussed the importance of differentiating between an intention to ‘gift’ a sum of capital to your children and an intention to ‘loan’. Failing to do so, may result in the courts scrutinising the terms, which can lead to lengthy and costly legal proceedings.
There is a legal presumption that advanced capital from a parent to a child is a gift. If there is no evidence to the contrary with which this presumption can be rebutted. In the event of a divorce or separation, the capital will fall into the matrimonial asset pot and be subject to distribution between the parties in financial remedy proceedings if it has been matrimonalised. If, however, a party can provide evidence that the advanced monies were intended as a loan from their parents (or family member), that was needed to be repaid in the near future, the court may indeed deem the capital advance as a ‘loan’.
Unfortunately, the need for distinction does not stop there. Even with evidence proving advanced money was intended as a loan, the court will have to ascertain the nature of said loan and determine how the capital should be factored into the settlement in the fairest way possible, reflective of the parties’ true financial circumstances and intentions.
Within financial proceedings, you will often hear lawyers referring to loans as ‘hard’ or ‘soft’ loans. A “soft loan” is a loan whereby there is unlikely to be an imminent expectation of repayment. For example, borrowing money from a close family member or friend. In contrast, a loan with stringent parameters and an expectation that it will be repaid in the immediate future is more likely to be a “hard loan”. A classic example of a hard loan would be a mortgage from a bank or a credit card scheme. Ultimately, the key factor is how likely, in theory, that the loan would be able to be enforced by the lending party.
If the court deems a loan to be a soft loan, which may or may not need to be repaid within a specified time frame, it will not consider it as true liability in your case and it will not be included in the pot of matrimonial assets to be shared during financial remedy proceedings. On the other hand, a hard loan will be considered when finalising a financial settlement.
The recent case P v Q (Financial Remedies)  EWFC B9 has given much needed guidance about whether a court is likely to consider an advance a ‘soft loan’ or a ‘hard loan’. In this case, His Honour Judge Hess helpfully outlined a non-exhaustive list of factors the court should consider when making this determination.
The above criteria has provided a much needed steer on whether an advance is a ‘soft loan’ or a ‘hard loan’, ultimately however, the legal framework remains discretionary and these factors should not be taken as an absolute rule. The nature of family loans does often fall into the realm of soft loans in the absence of clear documentary evidence to the contrary. However, the circumstances are important and ultimately, the outcome will be fact-specific to each individual case. There is a real possibility of disputes arising in the future if the correct formalities have not been followed.
It may feel difficult to broach the subject of formalising a loan with a family member but formalising the process from the beginning of the process can save the possibility of financial vulnerability and increased legal fees down the line and creates a clear factual matrix as to the nature of the capital advance.
If you are considering advancing monies to your child, or have any questions regarding family loans, please do not hesitate to get in touch for confidential advice about your specific circumstances.
Kate Elliott is Head of our Horsham team and a Specialist Family Solicitor and Mediator.