Family Loans in Divorce Settlements
Research carried out by Legal & General in 2020 found that one in two (56%) of first-time buyers aged 35 and under will get help from the Bank of Mum and Dad to help buy a property. This figure represents almost 23%, or one quarter, of all transactions in the UK mortgage market. Around 30% of that 56% figure expect to pay ‘some’ of the money back.
A majority (39%) of these loans, L&G suggests, come from savings accrued by Mum and Dad. There are also instances of borrowing themselves, drawing down on investments for retirement, or downsizing their own property, which can leave Mum and Dad in their own financial difficulties, should they require finances for future care needs.
Unsurprisingly, given the figures above, familial loans are increasingly appearing in matrimonial finance disputes. It is not uncommon for one spouse to assert a debt, while the other asserts it to be a gift.
How, then, are these ‘loans’ being treated?
Due to the increase in this trend, it is helpful that a recent case – P v Q [2022] drew together a number of earlier cases where these funds had been considered. In the P v Q case both parties asserted that debts owed to family members must be taken into account when dividing the marital assets.
The first question His Honour Judge Hess, a leading Family Court Judge, considered was “…whether these advances should be regarded (in strict legal terms) as gifts or loans”. He opined that as a matter of general principle, for an advance of money to be a gift, as opposed to a loan with an obligation to repay, there must be an established intention to give – known as the animus donandi.
If a transaction is considered to be a loan, then it could, in theory, be enforced, and could then in theory, be considered on the asset schedule for consideration in the division of the marital assets. In the P V Q case, both debts were loans which could be enforced, theoretically.
That brings us onto the consideration of ‘hard’ and ‘soft’ debts in matrimonial finance matters, which has often been a bone of contention.
The following principles emerged from the P v Q case, and an article in 2015 from a Family Law text:
- Once a Judge has established that a contractually binding obligation to a third party exists, the court can consider whether the obligation was a hard obligation to be included, or a soft obligation which can be left out as a matter of judicial discretion.
- The key factor is whether the debt can be enforced
- Factors pointing to a hard obligation included:
- an obligation to a finance company;
- terms with the feel of a normal commercial arrangement;
- obligations arising out of a written agreement;
- a written demand for payment, a threat of litigation or actual litigation, or intervention in the financial remedies proceedings;
- an absence of delay in enforcing the obligation;
- where the amount of money was such that it would be less likely for a creditor to waive the obligation, either wholly, or partly.
- Factors pointing to a soft obligation included:
- an obligation to a friend or family member with whom the debtor remained on good terms and who was unlikely to want the debtor to suffer hardship;
- an obligation arising informally, with terms that did not have the feel of a normal commercial arrangement;
- no written demand for payment despite a due date having passed;
- delay in enforcing the obligation;
- an amount of money such that it would be likely for the creditor to waive the obligation, wholly or partly, albeit that the amount involved was not necessarily decisive – there have been instances where large amounts of money were treated as soft obligations.
When those principles were applied in the P v Q case, the debt owed by the wife to her father was considered to be at the soft end of the scale. It was unlikely that she would be required to make any repayment, notwithstanding that there was a loan agreement document which was entered into at the time the funds were advance.
The debt owed by the husband to his mother also fell into the same category of being a ‘soft’ obligation. Husband’s mother would not seek repayment, and nor would she go to court for enforcement.
In the circumstances of this particular case, husband had already repaid his mother. Given the debt was considered to be soft, it was accordingly re-credited to his side of the balance sheet prior to the division of the assets. The fact he had repaid it did not change the hard/soft status of the loan. It was determined that he had no obligation, legally or morally, for the repayment to be made.
Is my family loan ‘hard’ or ‘soft’ ?
Determining the answer, however, is not an exact science and the factors listed above are not to be considered exhaustive. Each case will turn on its own facts with some ‘advances’ falling on one side of the divide, while others may fall on the other. Ultimately, it will be for the Judge to exercise his or her discretion but with regard to a) the above factors, and b) all of the circumstances of the case.
If you want to discuss your own particular circumstances, where familial loans may be apparent, or simply to seek advice following the breakdown of a relationship, please send an email to Ian Davies and we can arrange an appointment.