The guidance comes after an increase in litigation where parental loans have formed part of the financial resources to be divided between the divorcing couple.
In the case heard at London’s Central Family Court, His Honour Judge Hess took the unusual step of issuing advice about how different types of parental loans should be classified in an effort to help couples and parents decide whether loans should form part of any settlement, should the couple ever divorce.
In light of the case, lawyers are also advising couples who rely on the ‘bank of mum and dad’ for financial help to make contracts with their parents when handouts are given.
Nearly a fifth of housing transactions in 2020 were backed by parental loans and gifts, according to research by Legal & General and the Centre for Economics and Business Research.
In the Family Court case, a husband paid back a £150,000 loan that had been given to him by his mother. The mother had not asked for the money back and the payment was made after his marriage broke down. The wife argued that her husband made the payment in an effort to remove £150,000 from their combined funds so that it did not have to be divided. The court also heard that she had received €30,000 from her father which had been recorded at the time as an interest-free loan which she agreed to repay at her own discretion. The court sought to establish the grounds of each loan in order to establish whether they should form part of any settlement.
The Judge had to decide whether the parental loans were 'hard' or 'soft'. Hard loans tend to have conditions and carry an expectation of repayment, while soft loans are more informal. He decided that both handouts were at the ‘soft’ end of the scale and ordered that the husband’s repayment funds be re-credited to his side of the schedule while the wife’s debt to her father should not be included on the asset schedule. He also provided guidance for similar cases in the future, establishing firmer criteria for how different loans should be treated.
The direction means that courts and mediators negotiating out of court settlements can better define whether a parental loan is 'hard' or 'soft'.
Graeme Fraser, Head of Family and Partner at OGR Stock Denton, represented the husband in the case and said that large numbers of couples who accept money from the ‘bank of mum and dad’ may end up arguing over it further down the line if they divorce.
He said: “Stagnant wages and high property prices mean that parental loans are increasingly common for couples, especially those trying to get on the property ladder. Lending by family and friends is a driving force in the UK’s housing market with almost a quarter of borrowers now more reliant on financial support from loved ones. The recent guidance as to what constitutes different obligations will be helpful in many financial remedy cases involving property ownership, many of which are negotiated outside of Court, including in mediation."
He also advised: “Parental loans should be documented with everyone taking independent legal advice and preferably in the format of a commercial contract on an arm’s length basis with firm trigger dates for repayment of the amount owed together with interest added in the event of default.”
