Soft Loans in Financial Remedy Proceedings

Within family units, money is often moved around. It may be a ‘loan’ from a parent to help pay for a business start-up or a down payment on a house. Or it could simply be a financial gift. However, once the money has landed in your account, it is regarded as an asset. And if you then go through a divorce, it will need to be included in the financial considerations. But what is a soft loan, and does it play a part in those all-important financial remedy negotiations? And how can you decide what is a gift or soft loan? This topic is also commonly referred to as the Bank of Mum and Dad. 

What exactly is a soft loan?

Let’s explain the concept of a soft loan with an example. A parent gives their daughter a financial helping hand to put a deposit on a house. They loan her £50,000, with an understanding that the loan will be paid back at her discretion. It is also interest-free. The daughter then decides to divorce her partner and wants to leave the £50,000 out of her financial assets. This would prevent the partner from claiming half of the amount (£25,000) as part of the divorce settlement.

The daughter says that the money should be set to one side as it’s a loan that has to be returned to her parents. The partner then disputes this, saying that it was a ‘soft loan’ or gift and that the parent never expected it to be repaid. Therefore, it should be considered part of the daughter’s assets and subject to inclusion in the divorce ‘pot’.

What is a hard loan?

A hard loan is a little easier to quantify. It meets a specific set of criteria and is a loan that:

• Is provided by a finance company such as a bank or loan provider
• Is arranged as a commercial agreement
• Has a written agreement
• Usually has interest charges attached
• Will incur penalties or even legal action if it isn’t repaid in full.

By comparison, a soft loan is one that:

• Has been offered by a friend or family member
• Is an informal arrangement
• Doesn’t have any written agreement
• Has no interest charges and no ‘end date’
• Has a reasonable probability of having the repayment of the loan waived

A grey area for family law

The trouble with soft loans is that they are open to interpretation. While most financial arrangements have clear boundaries set out in writing, soft loans tend to be verbal agreements with no paper trail. This makes them difficult to pin down and can lead to confusion and disputes during a divorce. The authenticity of a soft loan can very quickly turn into a ‘he-said-she-said’ argument over semantics.

This is why any loan (and we’re talking specifically about loans and not gifts here) needs to be drawn up properly. If the amount climbs into the thousands, the status of the loan as ‘soft’ can be disputed.

Judicial ruling on soft loans

In general, the ruling is that for an amount of money to be regarded as a ‘gift’ or soft loan, there must be evidence of intent to give without a realistic expectation of repayment. A hard loan, by comparison, is given on the understanding that repayment in full will take place at a determined point.

In the case of a divorce, it may be necessary to rely on the judgement of the courts to determine whether a loan is hard or soft. If a judge decides that the loan is a soft one, it is down to their discretion as to whether or not it is included in the divorce’s financial considerations. In the recent case of P v Q [2022] EWFC B9,  HHJ Edward Hess gave guidance on the treatment of soft loans in financial remedy proceedings. This guidance is relevant to everyday practice as this topic frequently features in out-of-court negotiations and litigation.

Soft loans can be a challenging area to negotiate during a divorce. Not only do they affect the couple, but the family members who made the loan in the first place, too. To help untangle this particularly knotty problem, our advice is to talk to our expert family lawyers in Manchester or London who will be able to advise you.

Should you wish to speak to a Family solicitor for an initial discussion, then please get in touch today by email or call us on 020 8349 0321