Gift and Loan
So, your ex’s parents helped you buy your first home. Did the family give you the money or did then lend it to you?
Or, as we so often see, was it a gift when everything was working well in your relationship but when separation became a reality, did they suddenly say it was a loan that they want paid back?
What do the Family Courts say?
- If the money is a genuine loan, it will be included as a liability in the balance sheet. That means it is owed to that family member.
- If the money is a gift it would not be included in the balance sheet but would be considered as a contribution of the party to whom it was given.
Our article on Property Valuation and Property Settlement [August 21, 2022] shows how the Courts work through property matters to help couples in the division of the property pool. Even with the changes in 2024 in the Family Law Act, the process remains the same.
How do the Courts know it is a loan?
When parties have separated and are working out the division of the joint assets, the issue of whether the monies are a loan or gift can become an area of disagreement.
Loans from parents or other family members are rarely documented as they are usually made to a couple to help them get a start or if their finances are strained.
How to demonstrate that your parents’ loan is genuine
If your parents lent you money on the basis that you could pay it back over time, you will need to prove that an agreement was in place.
It is important that loans are documented in a way that provides clear evidence that the loan was always intended to be paid back.
Examples of documentation
- A formal and witnessed loan agreement with documented terms including repayment amounts and time for repayment;
- Evidence of repayments such as banking transactions or a schedule history of dates due and payments;
- A registered mortgage over property delineating to whom and how much the monies are owed.
The main way to prove it is a loan, is to put it all in writing.
Disclosure
It is important that parties comply with all financial disclosure obligations. There are very serious consequences, including financial penalties if parties attempt to hide monies which should be disclosed in the balance sheet.
If your family want to help you out, ensure that any loan is formally documented and registered.
Even if the money is a gift, it can still be taken into consideration as part of your contribution to the family’s share property pool.
What does this mean in practical terms?
Whether it is a loan or a gift will affect the size of the property pool.
If it’s a gift then the property pool is generally enlarged as no money has to be paid back out of the joint property pool.
If it is a loan, then the property pool will be reduced because the loan will be seen as a liability which will have to be paid back out of the shared monies so ultimately the parties get less money.
Your Case
Each case is decided on its own facts. Whether it is a gift or a loan is not the only matter that the Courts take into account when working out the division of the parties’ property after separation.
The financial and non-financial contributions of both parties will be considered, the needs of children, the length of the relationship and how these all made up the overall property of the parties.
If you need help from your parents, it is important that you document any money transactions they make for you and your partner, get legal advice and make it an official loan. No one wants to think that things will not work out but legal advice, now, can protect all parties and save a lot of money in the long run.
Has this article triggered questions regarding your own Family Law matter?
If you have any questions please contact us so that we can advise you the best way forward.
As all cases comprise individual circumstances, this article should not be relied on as legal advice. It is for information purposes only. You should seek legal advice before proceeding on any loan arrangement.
