Should money given to divorcing couple be classed as a gift or a loan?
The Family Court has offered useful guidance on whether money given to a married couple by their parents should be classed as a gift or a loan in divorce proceedings.
The issue was raised in a settlement hearing between a couple who had large shareholdings in an energy company they had set up together before selling.
The wife had had recently lost her job, while the husband remained CEO.
The husband paid his mother £150,000 at the beginning of divorce proceedings, claiming it was a repayment on a loan.
His mother had given each of her three children £150,000 to help them buy a house. Only one had repaid £40,000.
The mother said there was an expectation that her children would repay the money in the long term for her care costs as she entered later life.
The wife claimed the money had been a gift with no obligation to be repaid.
She also said she owed her own family £30,000 from a loan from her father for her education. There was a document stating the money was an “interest free loan” to be repaid at the wife’s “own discretion”.
The court needed to decide if the sums from the divorcing couple’s respective parents should be considered as gifts or loans.
In both cases, the transactions were loans which could, in theory, be enforced.
The key factor was whether it was likely a ‘hard obligation’ which would be enforced, or a ‘soft obligation’ which would not.
In both cases, the debts were ruled at the ‘soft’ end of the scale. It was revealed the wife had forgotten about the debt to her father until the divorce proceedings began.
The husband’s mother was unlikely to ever demand repayment of the loan, and his primary motivation in making the repayment of £150,000 was concern that the wife would share half of it.
The £150,000 would be re-credited to the husband’s asset schedule, and the wife’s debt to her father should not be included.
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Please note that the contents of this article are intended solely for general information purposes and should not be considered as legal advice.