The Bank of Mum and Dad: hard or soft loan?

Parents are increasingly assisting their children to get onto the property ladder, particularly with mortgage rates recently reaching the highest they have been since 2008. This, coupled with the rising cost of living, means that without financial help from family members some people may never have the opportunity of purchasing a property.

If parents are planning to gift or lend a sum of money to their children, it is important that consideration is given to what could happen in the event of a relationship breakdown between a child and their partner. What implications may this have on a settlement that their offspring is negotiating? It is therefore important to understand the family court’s approach for divorcing couples.

Divorce and the family court’s approach

Whether the court considers a payment from parents to be a gift or loan can have a significant impact on a divorce settlement. A gift can form part of the pot for distribution to the divorcing couple, where as a loan would be included as a debt and therefore deemed repayable.

When determining this type of payment in divorce proceedings, reference is often made to it being either a “soft loan” or “hard loan”. A payment in the absence of any other evidence is likely to be considered a soft loan, or in other words a gift. This means that there could be an untended outcome – in that the payment from the parents that was meant to help their child get on the property ladder could end up benefitting their divorcing spouse.

Helpfully, a fairly recent case, P v Q (Financial Remedies) [2022] EWFC B9, sets out lists of circumstances that may characterise a soft and hard loan. This includes guidance that a court is more likely to consider a payment to be a hard loan, and thus repayable, if it has the ‘feel’ of a normal commercial arrangement – there is a written demand for payment, litigation is threatened or started, there has been no delay in enforcing the obligation and there is intervention in the financial remedy proceedings. It is a high bar to get over, though, in convincing the court that the payment was intended to be a loan.

How to protect payments made to family members

Depending on the individual situation, the following options could be considered to help demonstrate that the payment is a hard loan:

• A formal loan agreement is prepared to include: interest payable, specific events that will trigger repayment of the loan and making repayments to the loan
• A pre- or post-nuptial agreement to protect the payment
• A declaration of trust drawn up when the property is purchased, and the payer’s interest or share being legally documented
• A trust arrangement put in place.

The above list is not exhaustive or guaranteed to enable a court to find that the payment is a hard loan. It is therefore important to obtain specialist legal advice on your individual circumstances so that tailored advice can be provided. Failure to properly plan can be an expensive and time-consuming oversight later.