Gift or Loan - lending money to relatives
Dec 05, 2019If you intend to provide monies to relatives, friends or related parties – such that the loan is not an arms’ length transaction, it is important to consider what ramifications that may have on your estate or may cause if you later seek to have that loan repaid.
There is a risk when you are lending money to a related third party, that if a dispute arose, there would be questions as to whether that money was intended to be a loan or a gift. The common situation that we see is where a parent lends their child money for the purpose of purchasing a house, but elects not to have that transaction documented. If that child were to subsequently divorce, and the monies have not been repaid, it is difficult without documentation to establish definitively whether the money was intended to be repaid, or was simply a gift to help the child get a foothold in the property market.
The Court has given a large amount of guidance as to what will assist in determining whether the money was intended to be a loan or a gift. Some of the factors they consider are:
- Was the transaction properly documented with a loan agreement, and if applicable an unregistered or registered mortgage, or caveat?
- Was the transaction on commercial terms i.e. was interest charged and repaid?
- Were repayments made by the borrower in an attempt to repay the amount that was borrowed?
- Was the borrower able to obtain a commercial loan from a financial institution?
- Was the transaction given proper formality and finality?
Ultimately the circumstances are considered as a whole, rather than there being one determinative factor. However, it is clear that there are a number of things you can do to better protect money that you are loaning someone to ensure that you are repaid and to prevent a dispute later down the line.
Contact the Shire Legal team if you have any questions.
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