Will my Parents get Their Gifted Deposit Towards my Family Home Back in my Divorce Financial Settlement?

The treatment of gifted house deposits in divorce proceedings 

If your parents gave you the deposit to buy your family home and you are now getting divorced, you will want to know if your parents will get their money back or if you will be awarded a bigger share of the family assets to reflect your family's contribution toward the growth of family assets.

In this article, our Family Law Solicitors examine the treatment of family loans and gifts in divorce financial settlement disputes.

Contact OTS Solicitors For Expert Family Law Legal Advice.

Parental gift or a loan, and why it matters

Nowadays, it is common for one set of parents to contribute a substantial sum toward the house deposit to help their child and their son or daughter-in-law purchase their first family home or to upsize. What happens if the couple then separates? A common issue in dispute is whether the funds were a gift or a loan.

The distinction between a gift and a loan is important because, if the funds were a gift and used to purchase the family home, the court will likely deem them a family asset. Family law principles on asset division after divorce state that family assets should be divided between a husband and wife, with an equal split as the starting point, unless there are good reasons to depart from 50/50.

If the house deposit was a loan, the court should treat the loan as a liability to be repaid before the assets are divided between the husband and wife. However, because the loan was from family members, the court may treat it as a soft loan and not classify it in the same category as other debt, such as a mortgage, credit card debt, or bank loan.

Evidence that a gifted deposit was a loan

Your Divorce Solicitor will want to know if the substantial money given to you by your parents or grandparents, or to your spouse from their extended family, was a gift or a loan towards your house purchase. There may be clear evidence that the money was a loan:

1. A formal loan document.
2. Evidence that the family treated the money as a loan in email exchanges.
3. Reference to the loan in a declaration of trust.
4. The registration of the loan against the title to the property at the Land Registry.
5. Payment of interest on the loan.
6. Reference to the loan in a prenuptial agreement or postnuptial agreement.

If there is no or limited evidence that a parent intended their payment of the deposit on the family home to be a loan rather than a gift, the couple will need to resolve this dispute before they can reach an agreement on how their assets should be divided.

Disputes over whether a gifted deposit was a gift or a loan

If there is a dispute over whether the gifted deposit on the family home was a loan or a gift, the family members who made the gift may need to intervene in the financial remedy application initiated by the husband or wife. The court can then rule on whether the money was:

1. A loan, or
2. A joint gift, or
3. A gift to one spouse.

Some judges will decide whether the funds were a gift or a loan at the preliminary hearing. In contrast, others will defer that decision until the final hearing, at which the division of assets will also be determined.

If family members are seeking the return of deposit monies, and this is disputed, they will need:

1. To take their own legal advice from a Family Law Solicitor on property in financial claims on divorce and their rights and options.
2. Legal representation in an application for leave to intervene in the court proceedings.
3. Advice on whether the amount of the loan justifies intervening in the proceedings and the potential cost consequences.

Family law legal advice about gifted deposits

When a Family Law Solicitor is advising a parent, husband or wife about a gifted deposit, their advice should emphasise that:

1. Every family law court case turns on its facts. It's impossible to say that a deposit will be treated as a loan or a gift, because that is ultimately the judge’s decision.
2. In some family situations, there is clear evidence that the gifted money was a loan, such as a formal loan agreement and the payment of interest. However, in some family law cases, judges have ruled that a deposit constitutes a loan when parents lent money in good faith without first executing documentation.
3. If the court finds that the payment was a loan and not a gift, the loan may be treated as a soft loan and, therefore, a loan that does not need to be repaid.
4. If the court finds the gifted deposit was a gift to either the husband or wife, the court could say that, although the gifted deposit is a family asset, a relevant factor in deciding that one spouse should get more of the family assets than the other spouse is the parental contribution from the extended family.
5. Time can be a factor in the court's decision on how to treat a house deposit from a parent. For example, after a short marriage, the court may find the parents intended their financial contribution to be a loan. If the divorcing couple have been married for 30 years and bought and sold several family homes and never repaid one set of parents' original house deposit, the court is more likely to rule that while the money started out as a loan, it morphed into a gift with no expectation that the money would be repaid.
6. Disputes over whether gifted deposits were a gift or a loan can increase the legal costs in reaching a financial settlement or add to the costs of going to court and getting a financial court order. That’s because the parents may be joined as intervenors in the court application, and there may be additional court hearings.

Experienced and specialist Divorce Financial Settlement Solicitors will look beyond the family and emotional aspects of the disputed house deposit to analyse the facts and how they apply to family law, and to the family court's discretion to make a financial court order.

When carrying out this exercise, a Family Lawyer will also consider the size of the deposit and the proportionality of adding to the parties' legal costs in obtaining a financial settlement where the deposit is contested. The extra costs may not justify the result if the deposit contribution was £7,000. The legal advice on how best to resolve the dispute may differ if the gifted deposit was £100,000.

Key takeaways on gifted deposits and divorce law

1. If parents or in-laws want to contribute towards a house deposit, there should be clear documents.
2. If parents intend the deposit to be a gift, it's important to make this clear for estate planning and inheritance tax purposes.
3. If parents intend their house deposit contribution to be a loan, they need the correct paperwork in place to reduce the risk of the debt being treated as a soft loan in divorce proceedings.
4. Parental estate planning and lifetime gifting should be combined with their son or daughter asking their spouse to sign a prenuptial agreement or postnuptial agreement.
5. Parents and the children receiving a deposit contribution should not be deterred from making or receiving a gift or a loan, as the deposit could be the difference between the couple being able to buy a property or not.
6. Where a couple have children, the goal of the parents and extended family should be to provide two homes for the children after the husband and wife have decided to separate and get divorced.

Talk to OTS Solicitors

Parental contributions and disputes over gifted deposits can provoke strong emotions during the resolution of financial claims in divorce proceedings. Sometimes, common sense and cost proportionality are forgotten because a parent or their son or daughter wants to prove that they are right; the money was a loan or a gift to them. In these situations, you, your parents or in-laws may need robust family law legal advice to help you reach an acceptable compromise and a financial settlement that meets both of your needs or strong legal representation in financial remedy proceedings to help you present your evidence clearly and argue your case for the best financial outcome.

Contact OTS Solicitors Today for Family Law Advice.

Appointments are available at our London office and by phone or online consultation.  

Our lawyers speak Arabic, Armenian, Farsi, French/Mauritian Creole, Spanish, Tamil, Tagalog/Ilonggo, and Urdu/Punjabi.

 

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