Hard or Soft? Family Loans within Divorces

I recently celebrated a milestone birthday which like many anniversaries gave me a chance for some reflecting back on how things used to be back in the heady days of the early 1980s. Without being unduly nostalgic, one of the things I noticed (and in fairness I have seen a number of journalists mentioning this as well) is that back in January 1982 the house price to average annual income ratio was 4.16 (basically meaning that an average house for a homeowner costs four times their annual wage).

In November 2021 the ratio was a whopping 8.85, and it is probably only a matter of time before it will go above 9 (source Home Price to Income Ratio (US & UK) – 75 Year Chart | Longtermtrends )

The Office for National Statistics have noted that the average UK annual salary is £31,772 so on that metric such an earner would be looking at purchasing a property costing £281,182. We then need to appreciate that the deposit for such a property would be £56,236 (assuming a 20% down payment is needed). In other words, our prospective homeowner would need to put down 177% of their annual income to even get a foot on the housing ladder.

When you also consider that the cost of living in energy prices, fuel costs plus the general inflation rate is increasing by the day, it is becoming more and more unrealistic for (particularly younger) people to save enough money to purchase a home. Consequently more and more people (assuming they are in a fortunate position to have this option) are having assistance from family members, usually but not always from their parents, by way of financial payments.

In a divorce context we see it is increasingly common for a couple to argue that cash injections from their parents are either a gift or a loan. Depending on which side of the argument you are on depends upon which category the payment should be – the person wanting to increase the available resources of the matrimonial pot will argue that a payment is a gift, the other party to whom it may be tactically advantageous to decrease the amount of the capital will often argue that the payment is a loan which needs to be repaid.

Precisely this issue came up in a case in the Central Family Court a couple of weeks ago (P v Q (Financial Remedies) [2022] EWFC B9 (10 February 2022) (bailii.org)) where His Honour Judge Edward Hess made a number of helpful observations:-

  1. For a payment to be a gift there must be evidence of an intention to give – para 19(viii), (emphasis added);
  2. If we are then faced with an enforceable loan the extent to which this should crop up in the asset table, affecting the net total is the extent of its softness/hardness. “This is perhaps an elusive topic to nail down” – para 19(ix);
  3. Factors that point towards “hard loans” include features of a normal commercial agreement/a written demand for repayment/a threat of litigation.;
  4. Factors that point towards “soft loans” typically are the reverse of 3 above, but also if the loan comes from a friend/family member with whom the “debtor remains on good terms and who is unlikely to want the debtor to suffer hardship” – para 19(x)(f)

Whilst there is never an absolute rule in what remains a discretion based legal framework, it does tend to follow that many family loans are described as “soft loans” and are often excluded from the asset table as a deductible liability or put in as a “nil” value.

What is clear however is that getting legal advice on matrimonial financial matters is crucial, and particularly at an early stage. I have known many family loans being treated by the courts as enforceable and to be deducted from the asset table; it is therefore really important to obtain the best evidence possible depending on what you are trying to establish. This is something that our team at Greens Solicitors are very skilled and experienced at doing for our clients, and we can arrange an hour’s fixed price consultation with you to discuss your options – please call us on 0121 233 2042 or email William.ham@greenssolicitors.org

William Ham
Director and Head of Family Department