The Bank of Mum & Dad and Divorce

The current cost of living crisis is making it harder and harder for people to save deposits to get onto the property ladder.  People have less disposable income, so are saving less, making the property ladder even further out of reach.   It is now often the case the “bank of Mum or Dad” steps in by gifting their children substantial lump sums of money to enable them to purchase a property and get onto that property ladder.

When there is an arrangement whereby (for example) a parent makes a loan, the parties quite often believe that loan is safe, and will be repaid over time, or when the property is sold.  Most cases than not, there is no documentation confirming the amount of the loan made, how the monies will be repaid and when, and whether interest will accrue on the loan.  It is often simply a bank transfer process.  The bank statements are often the only evidence of the monies exchanging hands.

The legal presumption is that this kind of financial contribution is a gift and not a loan.  It can also be referred to as a “soft loan”.

When parties divorce all assets and liabilities, whether in joint or sole names, fall into the matrimonial pot for division.  If a party asserts there is a loan to be repaid, the onus will be upon that party to evidence the loan, and that the loan is a hard loan and not a soft loan.  Soft loans are quite often excluded from the matrimonial pot resulting in the loan either not being repaid or one party repaying the loan on top of any financial settlement reached.

A recent case P v Q (Financial Remedies) [2022] EWFC B9 gives guidance about whether a Court is likely to consider such financial contributions as ‘soft loans’ or a ‘hard loans’.  In this case, His Honour Judge Hess outlines a list of factors the Court should consider when making this determination regarding loans.

There is not an exhaustive list of the factors that may make an obligation hard or soft.

Factors which on their own or in combination point towards the conclusion that an obligation is hard include:

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.

Factors which may on their own or in combination point towards the conclusion that an obligation is soft include:

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 obligation

It may be that there are some factors in a particular case which fall on one side of the line and other factors which fall on the other. It is for the judge to determine, looking at all of these factors and maybe other matters, the appropriate determinations to make in a particular case in the promotion of a fair outcome.

The above provides much needed direction on whether family financial contributions are ‘soft loans’ or a ‘hard loans’.  However every case is different and it is up to the discretion of the Judge to make the final decision in the absence of agreement.

There are ways to protect family financial contributions made by formalising the agreement.  A document known as a Declaration of Trust can provide details of how a couple own the property and in what shares, and also naming the parents and detailing the loan. A Declaration of Trust will provide a strong argument that the financial contribution is not a gift, but a loan, and must be repaid.

A charge placed against the property (a bit like a mortgage lender’s charge) would provide a very strong argument the monies need to be returned.

It would also assist if regular payments are made in repayment of the loan.

Each case is different with differing assets and needs.  If a loan is to be made to a couple getting married, it is very important legal advice is sought and the loan is documented to prevent difficulties in the event of divorce. Please contact Rayden Solicitors to discuss your situation further.