How gifts are treated in a divorce
If you are going through a divorce or separation, you would hope that Christmas is still an occasion that you can enjoy, no matter what your situation is. There are ways you can plan ahead to ensure that the children have a joyful day and for most people this will be a great time to escape from everyday stresses, such as going through a divorce or any other family law proceedings.
But what happens if, on Christmas day, you open a letter from a family member to see they have gifted you a generous sum of money to help out in these trying times?
If you are going through a divorce or dissolution, you may want to consider the fact that gifts are not exempt from a financial settlement, and may well be treated as a matrimonial asset to be divided.
Loan or Gift?
If you have been loaned money, rather than gifted it, this could change the way that it is treated on a divorce. The court will look carefully at whether it is actually a loan or a gift in the first place, and then, whether it is a soft or a hard loan. Usually it is a hard loan if the lender is a bank or building society, and it is often a soft loan if the lender is a family member or friend (especially when there is no written contract but simply a verbal agreement).
A hard loan will not be treated as a matrimonial asset, as it will need to be paid back to whoever loaned it, so it is excluded from the pot. But a soft loan may be considered as part of the pot, since there is not as much of an obligation to pay it back and it is harder to prove that there was an agreement to do so.
If a loan is offered by a family member or friend which you will certainly have to repay, take legal advice before being entered into. It is always better to have a written agreement in place. Based on recent case law (P v Q [2022] EWFC B9), the more written evidence you have about the loan, the better. This is because the court will want to see how much of an obligation there is to pay the loan back, and whether this will be enforced. The more paperwork there is, the easier this is to prove. You should also consider a repayment plan which is adhered to, whether they would like any security for the loan, or whether you may be better off taking out a loan from a commercial lender.
There are still no binding rules on what constitutes a hard or soft loan, and it may well be a matter that the court decides based on the evidence in front of them, if the parties cannot come to an agreement. Therefore, the most important thing is to seek legal advice as soon as you can, so you know where you stand.
Don’t be a scrooge!
As you are reading this, you may have already decided its not worth giving or receiving a gift if it is just going to be split in half with an ex-spouse, contrary to your intentions. Don’t be a scrooge. Instead, consider the options, and what you are hoping to achieve and for whom, before giving or receiving a gift, or loan.
If you are getting married, you may want to consider a pre-nuptial agreement to ensure that you have an agreement about any gifts you may receive from family members in the future, as it could help to protect your interests. If you are already married and you are likely to receive significant gifts or inheritance, it is not too late. You can consider a post-nuptial agreement to set out how these should be treated if you do ever separate.
Goodman Ray can advise you on all aspects of your family law finances, and it is important to plan ahead over the Christmas period, so please do not hesitate to get in touch with us on 020 7608 1227 for more information.
This article is written by Isaac Beckett, Senior Paralegal at Goodman Ray.
