When is a loan not a loan?

No, this is not just a riddle – it can be a really serious problem for couples who are breaking up. This week, I was asked to give some advice on our local radio station about the difficulties that can arise when a friend asks to borrow money from you and then never repays it, and the damage that can do to your friendship Whilst preparing for the programme I started thinking about all the parallel situations that crop up in the family mediation cases that we work with every day.

In these times of economic austerity it is increasingly common for parents – ‘the Bank of Mum and Dad’ – to ‘lend’ or ‘give’ their children money as a deposit for the purchase of a home. Whilst those children are unmarried, the arrangement may be quite straightforward.  But if that child has got married, entered into a civil partnership, or bought a house jointly with their long-term partner and that relationship breaks down, the situation can be much more complicated.

A scenario we frequently come across in mediation is this:

Sophie (29) is married to Pete (30). Five years ago, her parents ‘lent’ her and Pete £50,000 to put down as a deposit on the purchase of their first home. Around the same time, Pete’s parents ‘lent’ them £25,000 to do up the kitchen and bathroom. Sadly, the relationship broke down after the birth of their baby, Tom (2), and Sophie and Pete came to mediation with Cambridge Family Mediation Service to try to reach an agreement about the arrangements for sharing time with Tom, and to achieve a financial settlement so that they could proceed with a divorce.

During the mediation it became clear to both of them that the house would have to be sold, at which point Sophie said that her parents expected them to repay the ‘loan’ of £50,000 from the sale proceeds. Pete said that he was shocked to hear this because he had always been under the impression that this money was a ‘gift’ from Sophie’s parents, and that in reality they never expected it to be repaid. Sophie argued that her parents only intended them to keep the money on the basis that they were married – and now that the marriage has ended they definitely want it back.

The mediator asked whether anything had been put into writing at the time of the ‘loan’? Sophie said ‘No’, but her parents’ intention had always been very clear. At this point Pete disagreed loudly, and pulled out a piece of paper, which he waved at Sophie; he said it was a written agreement signed by him and his parents, saying that the £25,000 that they ‘lent’ for the kitchen and bathroom was a formal loan, with the expectation that Sophie and Pete would repay it whenever the house was sold. It was apparently dated around 5 years ago. Sophie took one look at the document, and said she’d never seen it before and that it was quite clear to her that Pete and his parents had only just written it to protect him in the divorce, and accused them of forging the date.

At this point, as you can imagine, the session became very stressful for both of them. The mediator intervened to calm things down and recommended that they each take legal advice about the status of the ‘loans’ so that they could share the advice at the next mediation session. The question for their lawyers was: ‘what would a court decide if it had to adjudicate on this issue? ‘

Of course, the answer in such cases is rarely black and white, and usually depends on all the circumstances of the case, together with any available evidence about what was intended by everyone involved.

The moral of the story is:  that if you want to avoid becoming entangled in complicated legal arguments about whether or not a ‘loan’ was really a loan, or in reality was intended as a ‘gift’, it is always best to:

  • Put down everything clearly in writing at the time, signed, dated and perhaps witnessed by someone independent, for example, your solicitor.
  • For significant sums of money, it is always wise to take legal advice before entering into any sort of substantial loan or gift of money.

A little bit of time and thought at the outset can save you a huge amount of stress and expense later!