How do I get money back that I paid for my son or daughter’s house?

It is not unusual for the bank of mum and dad to fund the deposit on a house for their adult child and their spouse.

Whilst it may have been verbally agreed by the spouse that the in-laws should get their money back it will often not be something that was recorded in writing at any point.

There are two ways in which this could be significant in your son/daughter’s Divorce proceedings.

One argument that may be made is that the monies advanced by you should be treated as a Contribution within Divorce proceedings. Contribution arguments can be highly relevant in marriages of short duration, and where one party has contributed more than the other party (either from their own assets or family assets).  The argument in marriages of relatively short duration is that credit should be given to the party who has provided such contributions either directly or indirectly. This is in essence the same type of argument that is advanced where the matrimonial home was owned by one party prior to meeting the other party.

Whilst contributions can make a significant difference in some cases it needs to be understood that the most important consideration by the Courts is the ongoing financial needs of the parties. It is often the case that the parties’ needs far outweigh the available assets, and in those circumstances, contributions could have little or no effect on the eventual outcome.

The other aspect to consider is whether the monies should be treated as a loan. When Divorce Finances are resolved by Courts, the Court has regard to both parties’ debts. There is no automatic assumption that a debt is a matrimonial debt, and it is for the party who has the debt liability to demonstrate that the money was spent on the house, children or family holidays. If this cannot be demonstrated then it is quite possible that the other party will argue that said debt relates to none of the above, and possibly involves spending on a new partner!

Hard and Soft Loans

Divorce Courts have also developed the concept of “hard loans” and “soft loans”. A hard loan is money owed to a bank or other commercial entity. In simple terms banks do not excuse people from paying their debts out of the goodness of their heart.

Soft loans are monies owed to friends and family, and whenever soft loans are a factor, it is quite likely that the other party to the Divorce will be arguing that the monies advanced were in fact a gift and not a loan. When a mortgage has also been used to purchase the property, the mortgage lender will generally insist on a letter from the parents stating that the monies advanced are a gift.

The Courts recently gave some detailed guidance on the treatment of hard and soft loans and the Court commented that if a soft loan has the following elements (or some of them) it is more likely to be treated as a repayable loan:

• The obligation arises out of a written agreement.
• That there is a written demand for payment, a threat of litigation or actual litigation or intervention in financial remedy proceeding.
• There has not been a delay enforcing the obligation.
• That the amount of money is such that it would be less likely for the creditor to be likely to waive the obligation either wholly or partly.
• That the terms of the obligation have the “feel” of a normal commercial arrangement.

Options to protect the money lent to your son/daughter

It is important if you lend money to your child to purchase a property that the arrangements regarding the repayments are properly formalised. This prevents any uncertainty about the loan.

Here is an example of a couple of ways to protect the money lent to your child.

1. A legal charge could be created against the property and will be repaid to you when the property is sold and following the repayment of any mortgage.
2. A declaration of trust is a more common way of protecting monies lent. It can set out the basis of the loan and how it is to be repaid without affecting the legal ownership of the property purchased.
3. A simple letter confirming that it is accepted that the monies are a loan and not a gift, would be better than nothing at all.

Summary

It is therefore advisable to secure any loan to your son/daughter by way of written agreement, and ensure it specifies how the loan will be repaid.

Within proceedings between the divorcing parties the above arguments will be considered by the Court. It is however also possible for the person who has advanced the monies to apply to be an intervenor within the divorce financial proceedings.

The outcome of financial proceedings within Divorce are dependant on many factors, often case specific. At Andrew Isaacs Law we specialise in such matters and are happy to offer fixed fee initial advice appointments prior to taking on your case.

Article Dated:  07.11.24