In the current economic climate, it is extremely common for parents to provide financial assistance to their adult children.
This could be by helping with the purchase of a new home, contributing towards renovations on a property, gifting or loaning sums of money to help with bills and outgoings, or the payment of legal fees in the event of a separation or divorce.
For wealthier parents, gifting money is obviously an attractive proposition for inheritance tax planning, but what happens when a gift is made to a married couple who then divorce?
Naturally, the parent who provided the financial assistance may be keen to ensure that the gift remains with their child, that is, in their family.
While there are steps that advisers can take to protect their client’s wealth, it is useful to understand the approach of the family court where there is a dispute over monies that were either gifted or loaned.
The family court draws a clear distinction between a loan and a gift, and it is helpful to go back to basics in terms of definitions.
Gifts
A gift of money is when the parents have no expectation that the money will be repaid and the parents will not acquire a financial interest in a property or other assets purchased with those monies.
An outright gift cannot generally be recovered by a parent in the event of their offspring’s divorce.
The gift is likely to fall into the matrimonial pot for division between the parties to meet their respective needs, in the event that they separate or divorce, particularly if the funds were used to purchase the family home.
Loans
Unlike a gift, a loan is treated as a liability with an expectation or obligation that it will be repaid in the future. Such a loan will almost invariably be factored into the divorce court’s decision.
Soft loans
These are monies that are lent informally between family members or friends on good terms. They are often by verbal agreement, not documented, without a written demand for repayment and with a delay in enforcing the sum loaned.
The risk here is that the court can often determine that the soft loan is actually a gift and not a true liability or that the funds do not have to be repaid any time soon, if at all.
Hard loans
A hard loan is a loan taken out with a financial institution such as a bank, building society or credit card company. There are terms and conditions that make it a commercial arrangement with an expectation that it will be repaid in the future and can be enforced in the event of non-payment.
