Borrowing or lending money to family or friends
In the economic conditions that we currently live in and the reality of the fact that it is becoming increasingly more difficult for people to get on the property ladder, we are seeing an increase in people borrowing money from family or friends to put towards deposits for houses.
People in need are also turning to family and friends when they sadly find themselves in financial difficulties rather than suffer the extortionate interest rates applied to credit cards or “pay day” loans.
However, we are also seeing an increase in litigation where one party believed a sum of money was gifted to them, whilst the other party believed they were loaning the money, and it would be repaid. So how do we establish what is a gift and what is a loan and how can people avoid falling into this trap and having to turn to solicitors to recover their money?
The presumption of advancement: what it means for family loans
One particular area where people need to be wary is when money changes hands between parents and children or from spouse to spouse. Here the Common Law “Presumption of Advancement” applies. This presumes that where a transfer of money is made between a married couple, or from a parent to a child, a gift is presumed. Therefore, if the lender does not have anything in writing signed by the borrower confirming their agreement that the sum of money was a loan to be repaid, the Court will presume that the money was a gift in these circumstances.
Another common issue that we see is when a couple buys a property together and parents of one party contribute financially to the purchase of that property. The relationship breaks down between the couple and the parents then want to recover the money they put towards the property rather than see it pass into the hands of the ex-partner, or at least ensure that the funds stay with their child.
The reality of this situation is that it is very difficult to recover those funds unless the correct steps were taken from the outset when the property was purchased. If there is no documentation specifying that the funds should remain with one party, it is most likely that the Court will presume the money was a gift to both and the proceeds of the sale will be divided in accordance with how the property is owned, meaning that half or a portion of the money provided by the parents will pass to the ex-partner. If the parties are married, the money will form part of the “matrimonial pot” of resources available to split between the parties to meet their respective needs, meaning again that it would not be recoverable.
Using a deed of trust to safeguard financial contributions
So how can parents protect the money that they gift to their children? One option would be to have a Deed of Trust (also known as a Declaration of Trust) drawn up by a solicitor between the parties buying the property (i.e. the child and their partner). A Deed of Trust outlines the ownership arrangements and financial interests in a property held by two or more people. It can specify that the gifted funds belong solely to the child, ensuring that, in the event of a relationship breakdown, the child’s financial contribution is protected, and any division of property respects this arrangement. This method will also satisfy mortgage lenders’ requirements with regard to the source of funds and not raise concerns surrounding other parties having a potential claim on the property. Our Private Client team can advise further on this subject and draw up a Deed of Trust as required.
What can you do if you have loaned money to a friend or ex-partner who is now refusing to pay it back and claims that it was a gift?
Our Dispute Resolution team will be able to support you in this area. They will be able to advise you on the Pre-Action Protocol for Debt Claims. Parties will first need to follow the steps outlined in these protocols before issuing Court proceedings if the loan remains unpaid.
How can we help?
Hannah Steenkamp is a Solicitor Apprentice.
If you need advice on recovering a debt please contact our Dispute Resolution team on 01245 584523 or complete our online enquiry form.