How should family loans be dealt with during a divorce?

It’s common for parents to want to help their adult children financially, for example, providing support when a couple buy their first home together. But how should this money be dealt with if the couple are married and later divorce?

When the property was purchased, the couple will have been required to tell the solicitor and mortgage lender whether the deposit was being gifted or loaned. In recent years, mortgage lenders have become increasingly intolerant towards deposits being loaned. Mortgage companies will generally insist that the deposit is gifted to protect the equity in the event of non-payment of the mortgage. Those who are gifting the deposit will often have to sign a form confirming that it is a gift and that they will not seek repayment of the monies. 

If that couple later separates, it’s common for the benefiting party to claim that the payment was in fact, a loan, rather than a gift, to reduce the amount of equity in the pot for division. But a Family Court will not force these monies to be repaid, when the person who has loaned the money has confirmed to the mortgage company that it was gifted.  A gift is a gift and if someone signs a form in the full knowledge of what they are signing, then those monies do not become a loan if divorce and separation occur.

Our advice to people wishing to make or receive financial support to family members is to put an agreement in place at the time the monies are loaned. The written loan agreement should specify how much was being loaned, how it is to be repaid and by what date.  It should also set out the terms of any interest that would be payable and what you would do if the loan is not repaid (for example issuing a County Court claim).

If you do decide to go ahead and make a gift rather than a loan, remember that a gift does not become a loan if the couple later separate. So you should be aware that these monies will become part of the matrimonial assets should the couple divorce. You may also wish to consider a pre or post-nuptial agreement to provide some protection for these assets in the event of a separation.

Each family’s situation is different, and we would encourage you to come and talk through your own circumstances with a member of Harrowells Family team.