Is it a gift or is it a loan?

A frequent question that comes up with our customers, is whether a sum of money given by a parent to the couple, or one of them in particular, is a gift or loan .

Clarity on this matter has been somewhat reached through the judgment passed by HHJ Edward Hess on the 10th of February 2022 with regards to the case, P v Q .

You can read the full details of the case here, however, we have outlined the key takeaways and summary of the case below.

The issue:

There were two similar situations whereby the husband in the divorce proceedings had been given a substantial amount of money by his mother which had been used to improve the family home. The wife had also been given a smaller amount of money by her father, which had been used for her MBA graduate degree. The husband repaid the ‘loan’ to his mother during the proceedings, and an issue arose over his intentions for doing so and whether or not both sums of money should be included in the assets schedule.

Key takeaways:

• Whether an amount of money given by a relative is deemed a 'gift' or a 'loan', and if a loan, whether it is a ‘hard’ or ‘soft’ loan.
• There are a number of factors outlined by the Judge below which might impact whether a sum of money falls into either category.
• If a sum of money is deemed hard it should be included in the asset schedule, if it is deemed soft then it’s at a Judge's discretion whether or not it should be included.
• In this case, both sums were deemed soft, the money given to the wife was excluded and the money that the husband repaid to his mother was added back into the asset schedule.
• The Judge dismissed the notion that the mother’s loan should be made ‘hard’ simply because it was repaid by the husband during the proceedings and that this was in fact a tactic used by the husband to ensure his wife did not share half of this.

Summary of the case:

Previously the wife was the children’s primary carer and the husband was the breadwinner. The couple in question owned a home in London however moved their children to the mother’s native home in Germany in 2016. The couple started an energy company together in Germany and each holds shares worth around the £2 million mark. Since separation, the wife has moved back to London for her job, and the children live with the husband in Germany where he is their primary carer.

After outlining the context of the case, the Judge stated:

“I now turn to an issue which has created a good deal of argument and ill-feeling between the parties: the extent to which assets affected by the respective transactions between each party and members of their own family should be included on the asset schedule. The following picture has emerged”

• The husband gave his sister £25,000 and also his father a similar sum of money. The wife argued that this should be included in the asset schedule, but the Judge dismissed this. A third claim by the wife was explored further by the Judge.
• The husband's mother gave £150,000 to each of her three children to assist them with housing costs, with no documentation drawn up. No demand was ever made for repayment of these sums and there was no discussion about the circumstances in which repayment would or might be expected.

His mother stated in court:

“The bottom line is that when I am no longer able to look after myself (I am now 76) they would repay the money in a reciprocal, supportive, manner.”

In April the husband wrote to his wife in an email:

“I fail to see how you are being taken advantage of by me offering to split all of our joint assets 50/50 with you, after paying my mother’s down payment on my inheritance - which she brought forward explicitly so that we could raise a family in a house we owned rather than renting”.

• In June 2020 the husband repaid the £150,000 to his mother without being asked by her and without reference to his wife, which he asserted was repayment of the loan.
• He argues that this money has now gone and should not appear on the asset schedule. The wife argues that this payment was ‘a cynical manipulative device to remove £150,000 from the asset schedule’ so that it did not have to be divided 50:50 with her based on sharing principles.

However, the wife then included the following:

• In 2004 the wife had been given €30,000 from her father, to fund her MBA. This was documented as an ‘interest-free loan’ whereby there was no repayment date set and it was at the discretion of the wife to pay back. She hadn’t disclosed this on her Form E, as she had forgotten, and this had only resurfaced in January 2022 whilst going through ‘old papers’.
• The wife told the judge that whilst she didn’t expect her father to pursue the debt, she felt that he could and she is raising it in the wider context of her husband's loan from the mother.

The Judge needed to assess whether these should be regarded as gifts or loans and then secondly if loans, whether these were hard or soft.

As stated by the Judge:

“As a matter of general principle, for an advance of money to be a gift there must be evidence of an intention to give - the animus donandi . In neither instance, in this case, has either party produced persuasive evidence of such intention in the respective advancing parent and I am inclined to accept what the husband’s mother told me and what is contained in the 2004 document. On the face of it, both these transactions are loans which could, in theory, be enforced.”

However the inclusion/ exclusion of a technically enforceable debt in an asset schedule can depend on its softness/hardness’ and if a loan is considered soft, it is at the Judge’s discretion whether or not it is included.

There is no specific test for this, just various factors that on their own or a combination of may cause a particular obligation or loan to fall into one category or the other.

Factors for hard obligations:

• the fact that it is an obligation to a finance company;
• that the terms of the obligation have the feel of a normal commercial arrangement;
• that the obligation arises out of a written agreement;
• 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;
• that there has not been a delay in enforcing the obligation; and
• 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 for soft obligations:

• 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;
• the obligation arose informally and the terms of the obligation do not have the feel of a normal commercial arrangement;
• there has been no written demand for payment despite the due date having passed;
• there has been a delay in enforcing the obligation; or
• 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 obligations..

In the above case, the Judge ruled:

• The loan from the wife’s father to the wife falls into the soft category. There is little evidence that repayment would be required and this is supported by the fact she had forgotten about the loan.
• The loan from the husband’s mother also falls into this category according to the Judge. Re-payment was unlikely to be demanded. Until the divorce proceedings, the loan was regarded as an advance on the husband’s inheritance.

The Judge argued that the husband’s primary motivation in making the payment of £150,000 to his mother in June 2020 was because he was concerned that the wife would share half of it if he did not do this.

The Judge ruled that he would not change the status of this debt to hard simply because it was repaid by the husband, as this would be unfair and reward his behaviour.

As a soft debt can be included or left out of the asset schedule, at the Judge’s discretion, in this case, the wife’s father's loan was excluded, and the money the husband repaid to his mother was to be re-credited.

What does this mean?

If you’re not sure whether you need to include a loan from a family member or friend in your financial settlement, book a coaching session with an amicable divorce specialist who will be able to help clarify whether this would need to be included in your consent order.