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Loan or Gift – Is The Money Repayable to Your Parents?

A recent High Court decision of New Zealand ordered the child to repay funds to her parents – Loan or Gift – is the money repayable to your parents?

As property prices rise and more and more, first home buyers are locked out of the market. As a result, there has been an increase in the number of families that have relied upon contributions from their own parents or other relatives to enter the property market. When the parties separate, is that money treated as a loan or a gift?

Things that the Court will consider when posed with this scenario include:-

  • Was a loan agreement entered into at the same time the money was provided?
  • What representations were made to a banking institution at the time of purchase of the property regarding the lump sum of funds?
  • Was interest repayable? and if so, has interest been paid regularly?
  • Has there been any request for repayment or part repayment? And if so, has this been complied with?
  • Were there any other terms of the agreement? For example, repayment upon sale of the property.
  • What other evidence is there to suggest that the funds should be treated either way?
  • Was it a gift for a special occasion? Was it gifted to both parties or only the family who is giving the fund’s child, eg the wife’s parents providing funds as a Wedding Gift to allow the husband and wife to purchase property, is the gift to both the husband and the wife, or to the wife only?
  • Has any litigation regarding the debt been commenced or threatened to be commenced?

Generally speaking, it may be clear to show the injection of funds from a parent towards the acquisition of property during the relationship, but it is difficult to show the true intention, especially if one party then asserts it was a loan upon separation that is now required to be repaid out of the property pool.

What is the difference?

If the funds are shown to be a true loan, then they should be repaid to the person who lent the funds out of the property pool. For example, a property may be required to be sold to pay out the loan. This is usually only in the case where the other spouse concedes that there was a loan between the other spouse and their parent providing the funds. In the event of an interest free loan, there is also an argument for a contribution to be found for the provision of those funds saving the parties significant funds during their relationship as a result of no interest being payable on those loans.

If the funds are a gift, they are considered a contribution from that spouse made directly to the acquisition, conservation or improvement of the property of the marriage or relationship. That party will likely receive an adjustment in their favour on a contribution basis to recognise the gift made by their family. The size of any adjustment in their favour will depend upon the size of the contribution made and its comparative size to the property pool, when the gift was made, and how the funds were used. The funds need to be shown to be attached to property that exists in the property pool today, not payment of living expenses such a private school fees or overseas holidays.

Recently, the High Court of New Zealand found in favour of parents who had lent their daughter money to purchase a property for the funds to be fully repaid. Trevor and Marian Warin of New Zealand, lent their daughter Colleen, a chartered accountant, the amount of $368,000. Marian stated that “Trevor and I are not a bank.” Colleen argued in her defence that there was no agreement for the funds to be repayable on demand, and that she was to pay the funds back when her financial position allowed her to do so. The High Court ordered in favour of the parents, and Colleen has been ordered to repay the full amount to her parents.

Whilst it is not often that parents will commence litigation against their own child, in this case it was necessary to cause the child to recognise the debt owed and to enforce such payment.

Every case will turn on its own facts and circumstances surrounding the provision of money, in the event you require tailored family law advice, please contact one of our specialised family lawyers today.

Image Credit – Boumenjapet ©

Written by Natasha Heathcote on September 13, 2017

Natasha has a strong passion for family law, and believes that the law can be used to achieve positive resolutions for her clients. When working with clients, Natasha shows compassion and first seeks to understand what is important to her clients, then looks for legal solutions that will best suit them. View Natasha's profile

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