In today’s economic climate, many are turning to family for financial support. Parents often help their children in purchasing their first homes, either through gifts or low-interest loans. While this generosity is admirable, it’s vital to distinguish whether the funds are a ‘loan’ or a ‘gift’, and to document the arrangement clearly. This distinction can significantly impact how these funds are treated in a property settlement matter, if a couple separates.

Why it matters

From a family law perspective, how these funds are classified can affect the division of assets. Gifts and loans are treated differently in a couple's property pool.

Gift or loan? The key differences

Gifts: Funds given without the expectation of repayment are considered gifts. Depending on the circumstances, these funds will likely be deemed a financial contribution for the person who was the recipient of the gift. This may lead to an adjustment in favour of the recipient, but not always.

Loans: If there is a clear expectation that the funds will be repaid, they are considered loans. Proper documentation is essential to establish this intent. Loans are regarded as liabilities, reducing the overall assets available for division. The repayment of the loan must be factored into the property settlement. Prior to entering into a loan agreement independent legal advice should be obtained

The importance of clear agreements

It's crucial that the party providing the money understands how it will be treated. Unintended consequences can arise if the nature of the funds is not clearly documented.

Consider this scenario:

Parents provide their child with money to buy a house with their partner. If this money is considered a gift, both the child and their partner are likely to benefit from it, even after separation. The reason for this is that there is no requirement to return the money, it has been absorbed into the couple’s property pool that is available to divide between them. Consideration will then turn to whether an adjustment should be made to the person whose family provided the gift in the contributions analysis in a property settlement. Depending on when the gift was received and the amount and the size of the pool and the length of the relationship, as well as all of the other various financial and non financial contributions and future needs of the parties will have a bearing the division of the overall pool. if the monies were loaned this reduce the property pool available for division between the parties.

Is it really a loan?

Simply stating that funds were intended as a loan is not sufficient, even though it may be convenient to a party’s case to assert this. The court will examine various factors in deciding whether it is a legitimate loan or not, including:

is there a written agreement?
who is the written agreement between?
are the terms of the loan defined?
are ongoing repayments being made or required to made?
is interest being charged on the amount loaned?
are there consequences for default?
is there evidence the loan may be forgiven?

For those considering whether to provide financial assistance, it’s essential to decide if the funds are a gift or a loan and to understand the implications of each. For loans, seek legal advice and ensure a written agreement is in place. Failing to take these steps can result in the funds being treated as a gift, leading to possible unintended consequences.

At Parker Coles Curtis, we’re here to help you navigate these complex decisions. Whether you're relaxing by the beach or settling into a new phase of life, ensure your generosity is protected with proper legal advice.