It is the case, now more than ever, that family and friends are lending a helping hand, and their cash, to get others on the property ladder.

Recent research suggests that the median parental contribution is £30,000. The research also tells us that family and friends are failing to make it clear that this money is a loan rather than a gift. Furthermore, only 14% of friends and family are taking legal advice in an effort to protect their money before handing it over.

This kind of financial support can be invaluable, and often the only way to get on the property ladder for some. However, when relationships breakdown, litigation often follows as a result of there having been no proper consideration given to how that money should be protected.  A prime example of this is when a parent makes a loan to a child so that they can afford to buy a property to live in. When the child divorces, and their spouse disputes that the money was a loan and that it is to be repaid from the financial settlement, litigation becomes necessary. The litigation results in legal costs on top of the loan and can increase the costs of the divorcing parties as well.

A loan or a gift?

When parties divorce, the legal presumption, in the absence of evidence to the contrary, is that money received from friends and family is considered to be a gift.

If the money really is intended as a gift, meaning that you do not expect them to pay it back, the recipient may wish to put together a Living Together Agreement, often referred to as a Cohabitation Agreement. This would set out who put what in. If a recipient is to be married, or is already married, consideration should be given to drafting a Pre or Post Nuptial Agreement. This sets out what should happen to the money provided by family or friends in the event the marriage breaks down.

Sometimes money loaned by family or friends can be referred to as a ‘soft’ loan. A soft loan differs from a ‘hard’ loan. The court in PvQ (Financial Remedies) [2022] EWFC B9 gave guidance on this, indicating that a hard loan might have the following characteristics:

  • The obligation is to a finance company.

  • The terms of the obligation feel like a normal commercial arrangement.

  • There is written demand for payment, or the threat of litigation or consequent intervention in the financial remedy proceedings.

  • There has been no delay in enforcing the agreement; and the amount of money is such that it would be less likely for a creditor to waive the obligation wholly or partly.

The court might conclude that the loan was a soft one when:

  • It is an obligation to a friend or family member with whom the debtor remains on good terms and who is unlikely to want the debtor to suffer hardship.

  • The obligation arose informally, and the terms of the obligation do not have the feel of a normal commercial arrangement.

  • There has been no written demand for payment despite the due date having passed.

  • There has been a delay in enforcing the obligation; or

  • The amount of money is such that it would be more likely for the creditor to be likely to waive the obligation either wholly or partly, albeit that the amount of money involved is not necessarily decisive.

If the money is a loan that you require to be repaid, it is often best protected by drawing up a Declaration of Trust. This document can set out the details of how a property is owned and in what shares. It can also name the family members or friends together with details of the loan. In financial remedy proceedings, it is difficult to challenge a properly drawn up Declaration of Trust.

To further protect the money loaned, the friend or family member may wish to have a Legal Charge drawn up and lodged against the Title of the property with the Land Registry.

Additionally, a Loan Agreement may be appropriate.

Behaviour, such as the recipient making regular repayments would assist in determining the nature of the contribution if ever it came into dispute on divorce.

Intervening in proceedings

Where none of the above-mentioned measures have been taken to protect a contribution, and it is disputed in financial remedy proceedings on divorce that it was not anything other than a gift, it is possible to intervene in the proceedings.

An intervener would make an application to the court to be joined as a party to the proceedings.  Once joined, the court will make several directions in relation to the ‘claim’. Once received, the court will determine the claim as a ‘preliminary issue’ before the divorcing parties can move on to the stage of the financial remedy proceedings where they can try and reach a settlement.

In the absence of a Declaration of Trust, Charge or other supporting legal documentation, the court would need to determine if your financial contribution gave rise to a ‘beneficial interest’.  Claims in respect of beneficial ownership falls under the Trusts of Land and Appointment of Trustees Act 1996 (or TOLATA).

Before making an application to become an intervenor, it is important to seek specialist legal advice as to the merits of your claim. If you are defending a claim, you should also seek specialist legal advice. This is because the usual costs rules in family proceedings do not apply. Like in civil proceedings, the court will have the discretion to make an order for costs against the unsuccessful party.

In some cases, particularly where the money is an alleged loan from family, the court can decide in the first instance that it wants a detailed statement from the alleged lender, before, or rather than, inviting the alleged lender to intervene.

Taking legal advice at an early stage to ensure everyone knows the basis upon which money is given, and when it is to be returned, is key. I am a specialist in divorce and cases where there is intervention by a party outside of the marriage. Along with our conveyancing and dispute resolution specialists, I am on hand to provide comprehensive legal advice. Contact us today on 0845 287 0939, by email, or through our online chat below.