Is it a loan, is it a gift?

Is it a loan, is it a gift?

It is not uncommon for arguments to arise as to whether money paid by parents, or some other benefactor, to couples during their marriage is to be paid back, and thus regarded as a liability when assets are divided on divorce.

In the case of P v Q (Financial Remedies) [2022] decided earlier this year, HHJ Hess clarified the principles to be applied in cases concerning loans to/from family members.

He states that as a general principle, for the advance of money to be a gift, there must be evidence of an intention to give (the "animus donandi"), and in the absence of such evidence, the transaction is a loan and in theory, a debt that could be enforced.

The judge then went on to consider the previous case authorities dealing with the question of whether a debt is to be regarded as hard or soft, and described the issue as "an elusive topic to nail down".

The judge summarised the principles thus:

1) Having determined that a contractual obligation to a third party exists, the court may properly go on to consider whether such liability is to be regarded as hard or soft. If a hard debt, it automatically forms part of the liabilities, whereas if soft, the court has a discretion as to whether it should be taken into account as such.

2) There is no hard and fast test as to when a debt will be regarded as being hard or soft, and the case authorities cover a wide range of circumstances.

3)There is no exhaustive list of factors that may make an obligation to pay back monies either hard or soft. 

4) Hard Debt

Factors which point towards a debt being a hard debt include a) The fact that it is an obligation to a finance company; b) The terms of the arrangement have a "commercial feel" to them c) the obligation stems from a written agreement d) the existence of a written demand for payment, threatened or actual litigation to recover the debt, or intervention in the financial remedy proceedings between the couple, and e) that the amount involved is such that it is less likely that a creditor would waive the obligation, either wholly or partly.

Soft debt

Factors which lead to the conclusion that a debt is a soft debt include a) it is a loan from a friend or family member with whom the debtor remains on good terms, and who is unlikely to want the debtor to suffer any hardship, b) the obligation arises informally, and there is no feel of a commercial arrangement c) No written demand for repayment d) Delay in enforcement e) the amount involved is such that a creditor would waive the debt (either wholly or in part).

5) It is for the judge to look at all of the factors and make the appropriate decision in order to achieve a fair outcome.

Thus, when faced with what appears to be a "black and white question" about how the court will regard a "loan" from parents, the answer is not straight forward, and often difficult to predict.