Recent statistics show that the average age of a first-time buyer in the UK is 34.
With an uncertain economy, sky high mortgage rates, unaffordable property prices and a cost-of-living crisis, it is increasingly common for people to get help from family to get on or move up the property ladder.
In cases where family, or the "bank of mum and dad" have stepped in to provide financial support to help purchase a family home – one unpalatable question can be what will happen on a divorce and if their ex-spouse can have a claim to that money? Often people do not consider this until the issue arises, and a divorce is underway.
Divorce and the family home
The family home is usually considered "matrimonial property", even if it was brought into the marriage by one party, purchased solely or if it is held in only one party's sole name. In many cases, it is the major family asset. The family home tends to be treated differently to other assets on a divorce, and the starting position will be that it should be divided 50/50 (however there can be a deviation from that if required to meet needs).
Is it a gift or a loan?
Financial gifts made by the parents of a divorcing party can be divided on divorce despite having originated from that party's family. Where loans are made, unless the loan has been clearly agreed and documented, it may be treated by the court as a gift on any subsequent divorce.Often, parties buying a family home may be given a lump sum from parents without much consideration or discussion as to if this will be repaid, and if so, when. Unfortunately, the first time this arrangement can come under more scrutiny is if the parties who purchased the home together come into difficulty in their relationship and split up, needing to sell the property.
If you are a parent loaning or gifting your child and their partner money you should consider, before the money is handed over, how you expect that money to be treated in the range of circumstances that could follow. Often, people are surprised that money given without any terms around it will be shared by both their child and their partner evenly upon sale of a property and/or upon divorce. In circumstances where the marriage is a short one, this may be even more surprising for the person providing this financial support or the person who received it.
Even where funds are clearly identified as a "loan", they may not be treated as a loan that needs to be repaid upon divorce.
"Gifts"
Money given towards a deposit as a gift from one party's family is unlikely to be repaid to that party, or their family on divorce. Gifts typically form part of the matrimonial pot that would be available for division upon divorce. Therefore, if money from one party's family was given as a clear gift to a couple or to one spouse, it is likely that money will simply be divided upon a divorce. Often there are fierce arguments about whether money from families were given as gifts, or as loans and that can cause significant difficulties and delay when it comes to reaching a settlement on divorce.
"Loan"
Money given towards a deposit as a loan could either be seen as a "hard loan" or a "soft loan". If it is a soft loan, that money will form part of the matrimonial pot that would be available for division upon divorce, and the courts assume that loan does not have to be repaid (essentially, the court treats that money as if it were a gift). If it is a "hard loan" it is treated as a liability that needs to be repaid from the assets available. This is a challenging area and is often fiercely argued on a divorce.
When the court is deciding whether a loan is a "hard loan" or a "soft loan", it will look at the surrounding evidence and decide whether that loan is likely to be enforced against the party who took it.
Factors that may point to a "soft loan" include:
- The loan being taken from a family or friend who is, and remains, on close terms;
- The loan arrangement was informal and the terms do not look or feel like a normal commercial arrangement;
- There have not been written demands for repayment in line with the terms of the loan;
- Any terms have not been enforced, or there has been a delay in enforcing terms; and
- The amount of the funds mean that the lender is likely to be prepared to waive the loan (wholly or in part).
Factors that may point to a "hard loan" include:
The obligation is owed to a financial company;
- A written agreement being in place, with clear terms (rather than the loan being agreed verbally);
- The terms of the loan have the look and feel of a normal commercial arrangement. This can include, for example, interest being payable, what will happen if the borrower defaults etc;
- There has been a written demand or threat of legal proceedings in regard to payment;
- The loan or other terms of it have been enforced with no delay; and
- The amount of funds means the lender is likely to expect repayment and would be unlikely to waive the loan (wholly or in part).
By their nature, loans from families tend to be verbal, without conditions or interest and that can lead to many family loans being decided to be "soft loans" and therefore not repayable on a divorce. It is difficult to argue that a loan from a family member is a "hard loan" in circumstances where the loan is extremely unlikely to appear in any way commercial and it is also unlikely that steps would be taken to enforce repayment, or, that the lender will want the borrower to suffer hardship.
Protecting money from family
If the intention is that money given from family members is a loan, and should be repaid at some point, including in the event of a divorce, then there are steps that can be taken to try to protect that position:
- A Loan Agreement - Instruct a solicitor to prepare a detailed loan agreement, setting out the terms in writing, recording the conditions, tax implications and so forth.
- Pre-nuptial or Post-nuptial agreements – In cases where sums are being borrowed from family members, the ultimate protection for that money that can be obtained is a pre-nuptial or post-nuptial agreement between the spouses reflecting that the money is not to form part of any matrimonial "pot".
It is important to take advice from a solicitor, and whilst there are steps that can be taken to try to assist in protecting money received from family, the court can make decisions to override written agreements (including loan agreements and pre-nuptial agreements).