Money Matters: Understanding Hard Loans, Soft Loans and Gifts in Family Law

Family money can vanish in divorce.

Most people don’t realise how the courts view family financial help until it’s too late.

The Bank of Mum and Dad: A Legal Minefield

When parents help their children financially, they rarely think about divorce implications. That £50,000 house deposit? The business startup funds? That wedding contribution? All could be treated very differently than intended when relationships break down.

The difference between a gift, soft loan and hard loan might seem like legal semantics. But these distinctions can determine whether money stays protected or gets divided in a divorce settlement.

Let’s unpack what happens to family money when relationships end

What’s the Difference? Gifts vs Soft Loans vs Hard Loans

Gifts: No Strings Attached

A true gift has clear characteristics:

• Given with genuine intention to transfer ownership permanently
• No expectation of repayment
• No conditions attached
• Often motivated by generosity or inheritance tax planning

When divorce happens, gifts become part of the matrimonial pot available for division between both parties. This means your parents’ generous house deposit contribution could end up benefiting your ex-spouse.

Soft Loans: The Grey Area

Soft loans occupy that tricky middle ground:

• Typically provided by family members or close friends
• Informal arrangements with minimal documentation
• No fixed repayment schedule or interest
• No enforcement if repayment doesn’t happen
• Often accompanied by statements like “pay me back when you can”

Courts view soft loans sceptically during divorce. Without proper documentation and enforcement history, they’re often treated like gifts and included in the matrimonial assets for division.

Hard Loans: Legally Enforceable

Hard loans have distinct characteristics that courts recognise:

• Formal, documented agreements
• Commercial-like terms including interest rates
• Clear repayment schedules
• Evidence of enforcement if payments are missed
• Often secured against property or assets
• Could be from commercial lenders or properly documented family loans

Hard loans are treated as genuine liabilities in divorce proceedings and factored into financial settlements.

The Landmark Case: P v Q [2022]

The family courts received valuable guidance on this issue from the case of P v Q [2022] EWFC B9, where HHJ Edward Hess clarified how to distinguish between different types of family financial assistance.

In this case, a husband had repaid £150,000 to his mother during divorce proceedings. He claimed this was repaying a loan and should reduce the matrimonial assets available for division. His wife argued it was a tactic to reduce her settlement.

The evidence showed the mother had given £150,000 to each of her three children for housing, with no loan documentation, no repayment demands, and no discussions about when repayment might be required.

The judge concluded it was a “soft loan” that should be added back into the matrimonial pot, effectively increasing the wife’s potential settlement by £75,000.

How Courts Decide: Hard or Soft Loan?

When determining whether family money is a hard loan, soft loan or gift, courts consider:

• Is there written documentation of the loan?
• Are there commercial terms like interest rates?
• Has there been any demand for repayment?
• Has any repayment actually occurred?
• What was the lender’s intention?
• How large is the sum involved?
• What’s the relationship between lender and borrower?
• Would enforcement cause hardship?

The key question courts ask: “What is the likelihood that the obligation to repay will be enforced?”

Protecting Family Money: Practical Steps

Want to ensure your family’s financial assistance remains protected? Here’s what works:

For Parents Providing Money:

• Be clear about intentions Document whether the money is a gift or loan from the outset
• Create proper loan agreements Include interest rates, repayment schedules and consequences for non-payment
• Consider securing the loan Register a legal charge against property to strengthen enforceability
• Maintain the relationship as creditor Send repayment reminders and keep records of any payments made
• Consider a declaration of trust For property purchases, become tenants in common with a defined share

For Recipients:

• Suggest a prenuptial agreement Clarify how family money will be treated if the relationship ends
• Keep family money separate. Avoid mixing it with joint funds where possible
• Document everything Keep records of all discussions about repayment expectations
• Make regular repayments Even small, symbolic repayments help establish the loan’s legitimacy

The Warning: Needs Trump All

Even with perfect documentation, there’s an important caveat: if the money is needed to meet the basic needs of either party (especially housing for children), courts may still include it in the settlement regardless of its technical status.

What Should You Do Now?

If you’re considering providing financial help to family members:

• Decide whether you truly intend it as a gift or loan
• Document your intentions properly from the start
• Seek legal advice before transferring significant sums
• Consider how the money might be treated in a worst-case scenario
• Review existing family loans to strengthen their legal status

Family financial assistance comes from a place of love and support. But without proper legal protection, that generosity can lead to unintended consequences when relationships break down.

Don’t let family money become a source of additional conflict during an already difficult time. A small investment in proper documentation now can prevent significant financial loss and family tension later.