LAW
Gift or loan ?
Why it pays to be clear from the start
Planning – Tilly Bailey & Irvine partner and head of private family law Wendy Beacom says loan agreements are easily drawn up and can avoid unwanted complications in the future .
Tilly Bailey & Irvine partner and head of private family law Wendy Beacom says evidence of communication and intentions are key when it comes to third party involvement in transactions ...
I
am frequently asked to provide advice on the merits of repayment of lump sums being factored into a financial settlement or a property transaction being set aside .
This is invariably from the renowned institution called the Bank of Mum and Dad , but often involves other third parties .
One prime example is where a farming enterprise agrees for a property to be built by ( often ) one of the children and their spouse on land that is still owned by the farming enterprise or the original owners , likely their parents .
Without doubt the highest proportion of scenarios is the introduction of funds by a third party to the purchase of a property .
Often it is a parent transferring funds to a child with no consideration of a formal agreement as to repayment . The property is then purchased in the joint names of the child and his / her partner .
We often see that the new property owners will repay some money back to the parents . Is this then evidence that the cash introduced was a loan ? What happens if the repayments fizzle out , but the parents do not press for further instalments or set a deadline for the repayment of the balance of the money ?
This is the classic “ was it a gift or a loan ” and to which party was the gift or loan made ? Originally paid to the child is one example , but funds for repayments were coming out a joint account .
It is all too often argued that the cash was provided to one party and that they alone should repay it , but the other party ’ s position is that it was intended to be joint debt so needs repaying from the parties ’ assets .
In cases where parties are married and the transaction becomes a point of dispute , the parents or third parties can be joined into proceedings to give evidence as to the intention behind the transaction and who was to be the recipient / remain the owning party .
Put simply , the court will have to decide on the evidence it has before it . Quite often the issue is dealt with by the fact that the court will believe it to be a “ soft loan ”, and the court is likely to take a more lenient stance on repayment – that is , is it really to be repaid by child to parent ?
However , what if this is property built on land owned by another ? The owning party will clearly need to be joined into the proceedings to set out their claim .
I am also asked to advise frequently on whether a transaction can be set aside – for example , where a party has transferred an asset to a family member or a child for no consideration .
It could be argued that the context of this type of transaction has been for tax planning . That may well be , but again , the intention behind it must be considered in the context and timing of the transaction . If it has been deemed to be to hide assets or to take assets out of the reach of the other party to the marriage , the court can add back in the value of the asset .
Again , there are times when assets are transferred to one of the parties and they seek to state that it is not a matrimonial asset . This can be property , inheritance or other assets .
However , these types of assets will be deemed to be a resource that one party can potentially access , and the court can take it into account should it require to , to be able to meet the other party ’ s needs . Therefore , the matrimonial asset base can dictate what reliance the court may place on using the transferred asset to meet the needs of the case .
In the absence of documentary evidence , as often there is none , the court has to make a finding about intentions . It will look closely at discussions at the outset , the transaction itself and how , for example , money has been applied .
Agreements , though , can easily be drawn up , from a simple note signed by all involved to a more formal legal document known as a charge that is lodged with the Land Registry , for example , when a property purchase is made that then sets out terms of repayment if it really is a loan . Be clear as to what is intended before providing or accepting cash .
Significant legal fees are involved when there are substantive arguments around these types of transactions , but these can be avoided with proper communication / evidence produced as to the intention behind the transaction and whether it was a gift , a loan and / or to whom .
If you require any further assistance , please contact me or another member of our Private Family Law team in Wynyard on 01740 646000 . Visit tbilaw . co . uk / personal / private-family-law
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