How are payments from family members treated when couples divorce?

Transfers of money between family members are hardly a new thing. Gifts of money to a newly married couple are almost as old as marriage. More recently, lifetime gifts to children or grandchildren have become an effective way of minimising inheritance tax.

Similarly, when it comes to loans from parents (or grandparents or other family members). In an increasingly inaccessible property market, we frequently see money being loaned to help newlyweds afford a family home. With the cost of living crisis, couples often borrow money from family members to help meet bills and outgoings. And once divorce proceedings are underway, loans are sometimes made to help with legal costs.

Gifts or loans of money from family members are a regular a source of arguments when couples divorce. Often, the person who received the money will claim it was a loan, which was always intended to be repaid at some point in the future. The other spouse will just as often say the opposite, namely that any money was a gift, and repayment was never expected or discussed.

Does the Family Court take gifts and loans from family members into account when deciding what is a fair financial settlement? And, if so, how are they treated?

The short answer is they are taken into account. But how they are treated depends on whether the court decides it was a gift or a loan, and what the judge determines were the intentions and expectations at the time the money was provided.

Gifts

For a payment to be considered a gift, there must be evidence it was given with “no strings attached”, and no expectation as to repayment in the future.

If a court decides a payment from a family member was a gift, then it will treat it as part of the overall assets which are available for sharing between the divorcing couple.

Section 25(2) of the Matrimonial Causes Act 1973 sets out various factors which the Family Court must consider when deciding what is a fair financial settlement. One of those is any contribution which each of the parties has made. It might be possible to argue that a particular gift should be treated as one party’s contribution. For example, that a gift by the wife’s parents should fall on the wife’s side of the equation when calculating her contributions.

Whether a contribution argument is viable will depend on the circumstances. Amongst other relevant questions are these:

 When was the gift made?

 Was it expressed as being a gift to both parties, or just to one of the couple by their family?

 What has become of the money since? Has it been invested, used to buy other assets, spent on living costs, etc?

Even if a gift is successfully argued as a contribution made on behalf of one party only, that is not the end of the matter. Ultimately, the Family Court judge must arrive at a financial settlement which meets the reasonable financial needs of both spouses. This often requires the relevance of financial contributions to be limited, or disregarded altogether.

Loans

Payments which are not gifts are likely to be treated by the court as loans.

The Family Court identifies loans as either “soft” or “hard”. There is no definitive sorting tool to establish into which category a particular loan falls. Ultimately, the distinction comes down to the likelihood of repayment ever being enforced. If there is little or no prospect of enforcement, the loan will be treated as “soft”. Conversely, if there is an obligation to repay which it is reasonable to expect will be enforced, it will fall into the “hard” loan category.

Determining whether a loan is “hard” or “soft” is highly fact-specific. The considerations which point in one direction or another will vary from case to case. However, some helpful guidance was provided in a recent case, called P -v- Q (Financial Remedies) [2022] EWFC B9. His Honour Judge proposed the following as indicators which might (either individually or collectively) point in one direction or the other:

 Who was the loan from? Was it from a friend or a family member with whom the recipient remains on good terms? Or was it from a commercial lender or financial institution?

 What formalities were observed when making the loan? Is there a written agreement? Do the terms of the loan have the feel of a normal commercial arrangement?

 Has any due date for payment passed? If yes, has there been any demand for payment, or threatened (or actual) litigation?

 Has there been any delay in enforcing repayment?

 What amount was borrowed? Is the amount such that the lender might be expected to waive repayment (either wholly or in part)?

The judge was clear this is not a definitive checklist applicable to all families and circumstances. There may be different considerations in different cases that signal whether a loan is “hard” or “soft”.

As a general rule of thumb, the Family Court views “soft” loans as unlikely to be repaid in the future. Accordingly, a judge is not obliged to take them into account when deciding what is a fair financial settlement. Conversely, “hard” loans are treated as enforceable and quantifiable liabilities which must be repaid. So, they will be taken into account when deciding what is the appropriate outcome.

Some tips to protect payments made by family members

So, can families ensure any payments they make are treated by the Family Court in the way intended?

The short answer is yes, by being able to provide cogent evidence which proves those intentions. These are just some of the ways in which this can be done:

 Loan Agreements

If money is to be loaned, draw up a formal agreement that clearly sets out the terms: the amount being loaned, by when repayment must be made, whether the loan attracts interest, and so on.

 Statements of intention

If a gift is intended to benefit just one half of a couple, record this in writing. Set out to whom the gift is made and confirm there is no requirement for repayment.

Likewise, if a gift is intended to be conditional, make this clear in writing. For example, if a gift is intended to repayable in the event of the marriage breaking down within X years of the money being paid.

 Prenuptial agreements

Increasingly common generally, prenups are the ideal place to record any existing family loans or gifts, or any made in contemplation of the marriage. Similarly, a prenup can set out categorically how those gifts and loans are to be treated if the marriage ends in divorce.

Please get in touch with one of our family law specialists if you or a family member are involved in divorce proceedings, and need help about protecting any money gifted or loaned.

The content of this blog is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

By Emma Patel