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If I lend my child money can I get it back if he or she subsequently divorces?

With the cost of living crisis and the struggle for many just starting out to get on the housing ladder, children are increasingly looking to the Bank of Mum and Dad for financial support.

Sadly, this can, on occasions, lead to a dispute unless the basis upon which money is lent is made absolutely clear. The time to clarify this is before the monies are lent and whilst everyone remains on good terms. It is important to seek legal advice and to confirm any agreement in writing.

The issue as to whether a parent can seek repayment of monies is a separate and distinct issue from whether the loan will be taken into account on any divorce between spouses and, if so, to what extent.

For the parents, the first consideration is always whether the advance should be considered a loan or a gift. It is important for everyone involved to be absolutely clear about this.

If the monies provided are a gift then it is not possible to seek repayment, although the child might still be able to ask on divorce that the contribution made by their parents be taken into account when determining the division of assets, although there is no guarantee that it will be. Whether it is or not will be dependent on all the circumstances of the case. The important point for the parent is that they cannot seek repayment.

If the parent wishes to ensure that any monies are repaid, then the loan should be evidenced in a written agreement.  The loan agreement should say when the monies will be repaid i.e. will monthly payments be made to reduce the loan over time, or will the loan be repayable in full at the end of a specific time period; will interest be paid on the loan and what will happen if monthly payments are not maintained? The agreement should also specify who the monies are being lent to, and whether this is to both the child and a husband/wife or partner, or just the child.

In terms of the child, should they subsequently divorce, the court will consider whether the loan is considered a “hard” loan or a “soft” loan.

A hard loan must be repaid. A loan for instance, from a bank, would be a hard loan; there will be strict terms regarding repayment and no choice as to whether or when repayment must be made. Failure to repay the loan could give rise to enforcement action. A loan from a parent could also be considered a hard loan if the agreement sets out strict terms for repayment and if it is clearly enforceable.

A family loan, however, is often seen as a “soft” loan. A soft loan may be vague with regards to any repayment terms and there might be no immediate expectation of repayment. If this is the case then the court might well consider the loan has no immediate requirement to be repaid and its impact on a financial settlement arising out of a divorce could be reduced, particularly where assets are limited.

If monies are being lent by a parent to a child it will be important to take legal advice before payment is made, particularly if the borrower is already separated or intends to separate.

For more information and advice about this topic please contact our Carol Chrisfield at [email protected]