Gift or loan? How to deal with money received from the Bank of Mum and Dad when divorcing

It is common over the course of a marriage for a party to receive money from other members of their family; most often their parents.  Such transfers may be intended to financially assist a specific cause, for example, a deposit for a purchase of a property or home renovations.

It may be that such transactions do not come to light until exchange of financial disclosure takes place and that is when spouses need to assess and try and agree whether these transactions amount to gifts or loans and, if loans, which type.

It is the norm for the receiving party to argue that the sum received is to be repaid back, even if this has not taken place yet.  On that basis, the other party will argue that it should therefore be deemed as a gift and included in the financial disclosure as an asset rather than a liability.

As this scenario often takes place, there has been a lot of caselaw over the years that provides guidance to ascertain the nature of these transactions. The guidance provided by HHJ Hess in the case of P v Q (Financial Remedies) [2022] EWFC B9 allows spouses to consider their respective positions on the basis of a clear criterion. This is especially helpful when spouses wish to resolve matters by agreement, without the court’s intervention.

It was held that “for an advance of money to be a gift there must be evidence of an intention to give”. This is most often the case, but, in addition, the question of whether the “loan” is a “soft” or “hard” one needs to be considered. Once this is assessed, it can be ascertained whether or not the sum transferred should be included in the spouse’s disclosure as an assets or a liability.

Hard loans are usually deemed as such on the basis of the following:

(1) the fact that it is an obligation to a finance company;

(2) that the terms of the obligation have the feel of a normal commercial arrangement;

(3) that the obligation arises out of a written agreement;

(4) that there is a written demand for payment, a threat of litigation or actual litigation or actual or consequent intervention in the financial remedies proceedings;

(5) that there has not been a delay in enforcing the obligation; and

(6) that the amount of money is such that it would be less likely for a creditor to be likely to waive the obligation either wholly or partly.

If the conditions above are met, then the likelihood of the funds in question being deemed as a liability considerably increases.

Soft loans, on the other hand, are likely to be deemed as such when the following apply:

(1) it is an obligation to a friend or family member with whom the debtor remains on good terms and who is unlikely to want the debtor to suffer hardship;

(2) the obligation arose informally and the terms of the obligation do not have the feel of a normal commercial arrangement;

(3) there has been no written demand for payment despite the due date having passed;

(4) there has been a delay in enforcing the obligation; or

(5) the amount of money is such that it would be more likely for the creditor to be likely to waive the obligation either wholly or partly, albeit that the amount of money involved is not necessarily decisive, and there are examples in the authorities of large amounts of money being treated as being soft obligations.

In such cases the courts’ approach is to identify such funds as forming part of the matrimonial pot, and therefore to be divided between spouses.

Ultimately the specific transaction needs to be determined not only on the basis of the above criteria, but also with a view to promote a fair outcome.  There is therefore no straightforward answer as various circumstances of the specific case need to be considered before a specific sum of money can be included in a spouse’s liability or asset section in their financial disclosure.

It is important to keep the points above in mind, if you are considering to effect any transaction of similar nature.

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