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A common issue that arises when people separate is the treatment on divorce of monies advanced by one of their parents to help them get onto the property ladder or to move up the property ladder.
Monies are often given by parents either before a party is in a relationship or when a party is happily settled with their partner and because of this people rarely contemplate what will happen to that money on a later breakdown of their child’s relationship. However, the Office of National Statistics figures indicates that 42% of marriages will now end in divorce and therefore parents should be factoring the possibility of their child later divorcing into their decision-making process before advancing money to their children.
In my experience these agreements are often not documented which can lead to lengthy legal proceedings about the terms on which the money was given. Therefore, whilst early discussion about how this money should be treated, if at a later date the parties divorce, may be uncomfortable for all concerned, it is none-the-less a difficult discussion that should be had to avoid later disputes, stress and additional costs arising.
A recent survey by Legal and General estimates that parents on average are now lending children c. £6.3 billion in 2019 to help them onto the property ladder or move up the property ladder. To really put the scale of this lending into context this means that parents are now the 10th largest lender in the UK.
More than half of the 1,600 parents surveyed stated that they were lending their children money from cash resources, but others stated that they were using drawdowns from their pensions or equity release schemes to fund the advance. Worryingly, more than a quarter of those surveyed were not confident that they had enough money to meet their needs in retirement. This survey suggests that parents are taking risks with their own financial security to help their children which makes the terms of that lending, particularly repayment terms, more important. It is understandable that parents who advance their hard-earned capital to help their child are upset if their child later divorces and the money they advanced are in issue.
The answer to this question is that the treatment by the court of advances by parents to their children on divorce will be fact-specific to the circumstances of each case. For example, where there is clear evidence that an advance was a gift and those monies have been invested into jointly held assets or the family home, then the court is likely to look on those monies as a resource available to the parties to meet both of their needs. However, if there is a clearly documented loan agreement, the court is likely to treat the advance as a liability that will need to be repaid in line with the terms of the loan agreement.
In addition to the court making a finding that the advance was either a gift or a loan, the family court also often finds that such arrangements are a ‘soft loan’ i.e. a loan from a third party (usually a family member) made on very lenient or informal terms to assist a party. If the court finds that the advance by parents was a ‘soft loan’ then those monies will be treated by the court as a resource available to the parties to meet both of their needs. In my experience parents naturally want their money to benefit their child on divorce and not the other party or to be repaid to them. The court’s treatment of an advance as a soft loan therefore often leads to upset and resentment on the part of the parents who lent the money and their child, to avoid this scenario it is essential that legal advice is taken before any advance is made (please see the comments below).
The real issue arises where the terms of the advance are unclear and disputed by the parties. For example, one party may argue that their parents advance was a loan and must be repaid, whilst the other party argues that it was a gift or at best a ‘soft loan’ and is, therefore, a resource available to both parties’ needs. In these circumstances, the court will have to consider the facts and decide. These types of disputes invariably increase the party’s legal costs because the evidence will need to be filed as to each party’s case in respect of the monies in dispute. Furthermore, this type of issue can lead to the parents who advanced the monies also having to take legal advice, giving evidence or even being joined as parties to the proceedings.
In short, it would be sensible for the parents, their children and their child’s spouse to take legal advice before any monies are advanced to ensure that all parties have a full understanding of the legal implication of gifts and/or loans and the impact of any subsequent divorce. In my experience the greater the level of understanding between the parties, the clearer the evidence of the terms of the advance the fewer difficulties that are incurred on a later divorce.
Whilst this blog is focused on monies advanced by parents to their children to help them purchase properties there are many other reasons that parents lend monies which can include helping their children set up businesses, to help them purchase a car, fund private school fees or fund their legal fees on divorce. Whatever the reason for parents advancing monies to their children the terms should always be clear to avoid later disputes, legal costs and upset for all concerned.
If you are a parent considering advancing monies to your child, or if you are a child whose parents are about to advance monies to you, and you want a greater understanding of the issues involved then please get in touch to speak to one of our specialist solicitors.