When is a loan not a loan? Should you lend money to friends and family?

June 20, 2018

Whether it’s some lose change or funds towards a larger purchase the majority of us have at some point leant or been leant funds from a friend or family member. Whilst the majority of these transaction are of small value and easily written off, larger transactions can easily lead to disputes that may damage relationships.

With property prices ever increasing and the next generation struggling to get on the property ladder it is increasingly common for the bank of mum & dad, or grandma and granddad, to loan large amounts to assist family members to purchase their first property. However, if the family relationship breaks down, or if the people receiving the loan split up, the lender can end up out of pocket, with little to no recourse.

But Tayntons are here to help, so here are some simple tips to follow if you chose to lend or borrow money from friends and family:

Ensure the Loan Agreement is written down

Disputes between parties are most commonly caused by a disagreement over what terms of the loan were. Was there interest to be paid? When was the amount due to be repaid?

To avoid these pitfalls parties should always ensure they enter into and sign a correctly drafted loan agreement that makes clear the amount loaned, if any interest applies, when the monies are to be repaid and the parties to the agreement. This way if either party later disputes the agreement there is a clear document containing all of the terms to refer back to.

At Tayntons we have substantial experience drafting these agreements. Whether for a small loan to help start a business or a larger loan towards a property purchase, we can help you ensure your interests are protected in a clear Loan Agreement.

In the absence of a Loan Agreement, as an absolute minimum the parties should ensure there is some written record of the agreement, even in the form of email or texts.

Finally always ensure any funds lent are sent by a clearly recorded bank transfer. You can further assist yourself in the future by clearly referencing the payment as a loan on the transfer itself.

If it looks like a gift and acts like a gift… it’s a gift

If you gift or are gifted money for a specific purpose, and it is made clear in some way that the funds were gifted, then it’s a gift. The classic example of this in recent years is a gifted deposit.

As banks are increasingly cautious about lending and property prices are still on the rise, it is increasingly common for families to lend substantial deposit contributions to help the next generation get on the property ladder.

However, banks will not want anyone else, even if informally, owed money out of any potential sale proceeds down the line. To secure this most banks will ask the person to complete a deed of gift. This is a statement, from the person transferring the money, that the funds are an absolute gift. Irrespective of any agreement between the parties, the court will place strong importance on a deed of gift in any later dispute. This is to, protect the lenders security, ensure that the loan to value ratio of the property isn’t too high and that their loan takes priority.

So if it’s a gift, it’s a gift. If you wish to loan or borrow money as part of a deposit make sure you make your lender or broker aware to avoid later issues and never rely on later reclaiming funds lent if you completed a deed of gift. Additionally, if making a large gift, ensure you receive proper independent financial advice and confirm the gift clearly in writing. A gift may still have tax implications for you and the person receiving it.

Never lend what you can’t afford to lose

When it comes to loaning funds to friends or family you need to ensure up front that you understand the consequence of the funds not being paid back. If you don’t expect repayment, then you will be pleasantly surprised if funds are repaid. Conversely, if you need the funds to be repaid, you must carefully consider the impact any dispute may have on your relationship before you lend any money.

What if I loaned money but didn’t write anything down or I’m already in dispute?

Don’t Panic. We are here to help. Here at Tayntons we have extensive experience in both commercial and private debt recovery.

Whilst a written agreement ensures that any disputes can be dealt with far more quickly and cost effectively, the Court will still hear claims made on a verbal basis. With our experience in debt recovery we can advise you of your available recovery options, deal with any Court applications and finally carrying out enforcement of any debt recovery.

We offer a 45 minute initial consultation with our Gloucester solicitors for £125.00 plus VAT (£150.00).  Our fees are payable to your solicitor at the start of your meeting. Call Tayntons on 0800 158 4147 to book your initial consultation.