How Are Family Loans Treated on Divorce?

Many individuals will turn to the support of their loved ones when navigating a divorce. Increasingly, that support is not just limited to emotional matters, but a person’s financial needs as well. With interest rates at their highest levels for many years, individuals are relying on personal loans from friends and family as opposed to formal loans from high street lenders. These agreements are often informal, with little thought given to the terms of repaying that loan.

Gift or Loan?

When trying to resolve the financial matters associated with a divorce, it is common to encounter a situation where one party insists that money advanced by a spouse's parent, relative, or friend, should be repaid to them from resources available in the matrimonial pot. The other party may challenge this, arguing that the monies were in fact a gift that does not require repayment.

In this situation, a court must first determine whether the advancement of money should be considered a 'gift' or a 'loan.' A court will generally classify the money as a gift where there is evidence of an intention to give. If no such evidence exists, the court will likely treat it as a loan. 

‘Hard’ or ‘Soft’ Loans

The court draws a distinction between ‘hard’ and ‘soft’ loans. The legal authority  P v Q [2022] EWFC B9 sets out useful guidance which can assist parties, practitioners and the court when trying to determine the nature of a loan.  

A hard loan is generally a commercial arrangement, where the loan taken out is for a substantial sum of money. Typically, there is a written agreement which identifies strict terms of repayment and serious consequences for defaulting on those, such as penalty interest rates or litigation.  

In contrast, a soft loan reflects an arrangement where there are limited consequences to the borrower if the monies are not repaid. Usually, there will be a close association between the lender and borrower, such as a family relation or friend.  

Unless there is compelling evidence to the contrary, a court is likely to determine that money received from friends or family is either a gift or soft loan. In those circumstances, the court may be more likely to take the view that the repayment of a soft loan should come out of the borrower’s share of a settlement and not from the “top line” of the matrimonial pot. It is important to note however that each case will be fact specific, and the court maintains a wide discretion to make determination based on what is fair to the parties overall.