‘Tis the season to avoid financial disputes

Senior Associate, Daniel Adcock-Kirsh discusses the importance of seeking legal advice before making a generous gift or loan this festive season.

The festive season seems to get earlier and earlier each year, with the familiar refrains of Maria Carey and George Michael et al being played whilst the embers of bonfires are still smouldering. And what is the festive season if not the time for giving?

After giving generously, you naturally find yourself asking: was it a gift, or was it a loan?

It is not uncommon for parties who know each other, for example, friends, family or even business associates, to agree to provide funds to help the other party, usually on a short-term basis. This is usually done by either an informal agreement to loan the money or alternatively, it is intended to be given as a gift.

In most cases, the distinction ultimately does not matter as either the money will be repaid, or, in the case of a bona fide gift, the giving party does not expect to ever be repaid.

However, disputes can and do arise when sums of money have been either gifted or loaned to friends, family or close associates and it is unclear whether the money was intended as a gift or a loan. It is therefore important to understand the difference.

“Gifting” money can generally be defined as money given on the understanding that it does not need to be repaid.

Lending money is different in that money is given on the condition that it is paid back, usually by a certain date, with or without interest applied to the principal amount loaned.

There are many situations where it is important to recognise the distinction between the two. For example, when a parent gives money to their offspring to purchase a property or where money is transferred between business associates for one of them to purchase an asset. In each case, it must be established, before the transfer happens, the specific conditions which apply and that each party to the transaction is fully aware and agrees to these conditions.

In either case, particularly where the sums transferred are significant, it is always advisable to get something in writing to record what has been agreed. For example, in the case of a gift, written confirmation that the money is non-repayable, unconditional and the giving party expects to receive no interest in the asset to be purchased. In the case of a loan, a formal document setting out each party’s obligations, signed by both parties.

If you are planning on making a gift or loan, we would always advise that you seek legal advice beforehand. While this might seem disproportionate, having a formal agreement in place can help avoid disputes arising in the future.