Family loans in financial proceedings

The bank of mum and dad

Family loans are becoming increasingly necessary to help people get on the housing ladder. The Independent reported that in 2021, 49% of first-time buyers were supported by loans from their parents. Whilst many parents don’t pressure their children to pay the loan back quickly, they are often aghast at the thought of their money being used as an asset in family proceedings and potentially allocated to a third party who would never pay the money back. The loans can often be substantial, so it is worth considering what would happen if the house, or a subsequent property, ever became a matrimonial asset in divorce proceedings.

His Honour Judge Hess recently gave guidance in the case of P v Q [2022] EWFC B9, on the delineation between ‘hard’ and ‘soft’ loans and the court’s ability to include such loans on the asset schedules in family financial proceedings.

A summary of the case of P v Q [2022] EWFC B9

The husband and wife in the case had met at university and began living together in 2005. In 2006 they married and in 2010 they bought a family home in joint names. Also in 2010, the husband’s mother had advanced £150,000 to each of her three children to help with their respective housing costs. There were no official terms drawn up for the loans and no demands were ever made to repay them, although one of the children had voluntarily paid round £30,000 to £40,000 back, indicating that there was a general expectation the money would be repaid at some point. The mother wrote in a statement for court that:

“The agreement with all three of my children was that these were loans within the family, to facilitate their housing improvements, and on the understanding that this is my money that I choose to use to fulfil the needs of individual family members as they arise. The bottom line is that when I am no longer able to look after myself (I am now 76) they would repay the money in a reciprocal, supportive, manner.”

She went on to say that she would not have pursued the money at court but would have adjusted her will to reflect that any child who had not made any repayment would have their unredeemed loan amount taken from their inheritance.

Despite this, and there being no official terms to repay the loan, the husband (without any consultation with the wife) paid £150,000 to his mother from the family assets. The asset schedule he presented to court did not include the £150,000 and the wife sought to have the £150,000 returned to the assets schedule and to be considered in the financial proceedings. She argued that the money should be spilt 50:50 on the usual sharing principles.

Considerations of His Honour Judge Hess (HHJ Hess)

Initially HHJ Hess considered whether the money had been a gift or a loan and concluded there was no evidence of the intention to give the money. If it had been a gift, it would have been included on the assets schedule. The money was therefore a loan, which could technically be enforced.

The next matter was which category the loan fitted into, was it a ‘soft’ or ‘hard’ loan. The list he provided was not exhaustive, but the following are factors to help delineate between the two types of loan.

Hard loans:

1) the fact that it is an obligation to a finance company;

2) that the terms of the obligation have the feel of a normal commercial arrangement;

3) that the obligation arises out of a written agreement;

4) that there is a written demand for payment, a threat of litigation or actual litigation or actual or consequent intervention in the financial remedies proceedings;

5) that there has not been a delay in enforcing the obligation; and

6) that the amount of money is such that it would be less likely for a creditor to be likely to waive the obligation either wholly or partly.

Soft loans:

1) 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;

2) the obligation arose informally, and the terms of the obligation do not have the feel of a normal commercial arrangement;

3) there has been no written demand for payment despite the due date having passed;

4) there has been a delay in enforcing the obligation; or

5) 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, and there are examples in the authorities of large amounts of money being treated as being soft obligations.

HHJ Hess went on to say that

“It may be that there are some factors in a particular case which fall on one side of the line and other factors which fall on the other side of the line, and it is for the judge to determine, looking at all of these factors, and maybe other matters, what the appropriate determinations to make in a particular case in the promotion of a fair outcome.”

HHJ Hess concluded that the £150,000 loan by the mother was very much at the soft end of the scale. HHJ Hess was convinced based on the evidence, that until the event of the divorce, the mother was content to leave the loan without repayment. He also concluded that the husband’s primary motivation in making the £150,000 repayment to his mother was because the husband was concerned that his wife would share half of it if he did not do this.

HHJ Hess did not wish to raise the husband’s debt to hard debt status, just because it had been repaid, as that would

“be to reward and encourage manipulative behaviour and would, to my mind, be unfair.”

The £150,000 loan was therefore added back into the husband’s asset schedule to be considered for distribution between the husband and wife in their final financial order.

Considerations for parents

In situations such as these, the best way for parents to protect their money is to create the loan on a stricter basis, via a commercial document, and for all parties to seek independent legal advice. Children should maintain their obligations set out in their legal agreement and not let repayments slip. Parents should be prepared to enforce repayments, where the sums involved would create hardship for the parent if the money was ever to be distributed in a divorce settlement. Even if the money was given to a child prior to a relationship, a subsequent relationship should always be considered as a possibility before lending money to a child.

HHJ Hess acknowledged that arguments over the £150,000 loan in P v Q [2022] EWFC B9 had

“created a good deal of argument and ill feeling between the parties”

It is best therefore to seek early legal advice in family financial matters to avoid the emotional and financial pitfalls exemplified by this case.

If you need legal help or advice, our experienced family law team are here to assist you so please do contact us on 0118 951 6200 and ask to speak to a member of our Family team.