Understanding the Difference Between Gifts and Loans in Family Law Property Settlements

In times of financial uncertainty, it’s not uncommon for parents to provide their children with support. Support may come in the form of a gift or a loan. In the context of family law, gifts and loans are treated differently, and disputes can arise regarding how they impact property settlements after separation.

What’s the difference?

Gifts: If there is no expectation of repayment, the financial support is considered a gift. Gifts can take many forms, including cash, property, or other assets, given without any conditions or obligation to return the value.

Loans: When there is an expectation that the money will be repaid, it is classified as a loan. For example, parents might provide funds for a home deposit with the understanding that the money will be repaid over time or under specific conditions.

 

Impact on property settlements

Since a loan is expected to be repaid, it is treated as a liability during property settlement negotiations, which reduces the pool of assets available for distribution. The Court will closely examine whether the financial support was truly a loan, looking for evidence such as a loan agreement or a history of repayments.

The treatment of a gift depends on whether it was intended for one party or both. If a gift was given solely to one party, the Court may recognise it as a higher contribution by that party, which could result in a property adjustment in their favour. If the gift was intended for both parties, the situation becomes more complex. In some cases, the Court may determine that the gift benefited the relationship as a whole, in which case no specific adjustment is made for either party.

Tips for avoiding disputes

If you intend for financial assistance to be treated as a loan rather than a gift, there are essential steps to follow to protect your interests:

    • Draft a clear, enforceable loan agreement that is in writing and signed
    • Include a repayment schedule which outlines outline how and when repayments will be made, including any applicable interest
    • Ensure that both you and your partner adhere to the repayment schedule

Failure to follow these steps may lead the Court to classify the loan as a gift, with the funds being included in the asset pool and divided between you and your former partner, instead of being repaid to the lender.

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