SOFT LOANS, HARD LOANS OR GIFTS – THE BANK OF MUM AND DAD

Released On 13th Jun 2024

What are Soft Loans and Hard Loans?

It is common for families or friends to provide money to assist loved ones with large expenses that occur during their lifetimes. For example, parents often provide their children with a sum of money to assist them with their first house purchase. The difficulty arises when couples separate and there is a need to determine what is included in the ‘matrimonial pot’ and what belongs exclusively to one of the parties. Further difficulties arise when there was an intention that the family member or friend would be repaid at some point in the future.

There is currently a legal presumption called the presumption of advancement which states that courts will presume that, if a person transfers money or property to their child, this is considered to be a gift unless it can be proved otherwise. Once it has become intermingled with the existing matrimonial assets it will be difficult to separate this off if the marriage breaks down.

However, even if it can be proven that the advancement was not a gift but a loan, and therefore should not be considered an asset of the matrimonial pot but rather a liability, it is likely to be regarded as a soft loan. A soft loan is a loan which is usually provided by a family member or friend. The main differentiating factor between a soft loan and a hard loan is the expectation of payment. Hard loans are subject to strict boundaries and parameters with the expectation of payment within a certain amount of time or on a specific date. A common example of a hard load would be a mortgage.

In the recent case P v Q (financial remedies) [2022] his Honour Judge Hess outlined a non-exhaustive list of factors the court should consider when making this determination.

Factors which indicate a hard loan:

The obligation is to a finance company.
The terms of the loan have the feel of a normal commercial arrangement.
The loan has arisen from a written agreement.
There has been a written demand for payment or threat of litigation and possible intervention of the lender in the financial proceedings.
There has been no delay in enforcing the loan.
The amount of money means the lender is likely to expect repayment.

Factors which indicate a soft loan:

The loan is from a friend or family member with whom the borrower is on good terms. The lender is unlikely to want the borrower to suffer hardship.
An informal arrangement, in which the terms do not have the ‘feel’ of a normal commercial arrangement.
There’s been no written demand for payment despite the due date having passed.
The amount of money means the lender is more likely to waive repayment either wholly or in part. However, Judge Hess acknowledges this is not a decisive factor and there are examples in cases where large amounts of money were treated as ‘soft’ loans.

Why is this determination important to financial negotiations?

The determination between a soft loan and a hard loan is important because there is a difference in the way they are treated by the court. The court will only view a hard loan as a true liability. A soft loan is less likely to be considered a formal liability. However, the court has discretion to decide on a case-by-case basis.

Soft loans are not an easy area to navigate, they can add additional stress and conflict to a separating couple. In addition to this, there will also be a knock-on effect to the friend or family member who made the loan in the first place. To help you navigate this complex area of law, please contact our specialist family team at AmicusLaw who will be happy to provide tailored advice to your specific situation.