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A moral dilemma over gifts and loans

Annie Shaw / 12 March 2014 ( 18 April 2017 )

When is money given to my family a gift and not a loan? Money expert Annie Shaw advises a reader.

Woman holding a pound sign and a model house
Are there any legal implications when you gift money to your children?

A reader writes:

When I reached my company’s retirement age I received a tax-free lump sum from my pension.

Because I carried on working, however, I didn’t need the money for myself at the time and handed it to my daughter and son-in-law to use as a deposit on a house. 

Now that I have actually retired I would like the money back, but my daughter and her husband are refusing to return it. 

They say they believed the money was a gift, and since my son-in-law has been forced to take a lower-paid job after being made redundant, they can’t afford to pay it back anyway.

This doesn’t seem right. They don’t seem to stint themselves – they have a big car and still take plenty of holidays. Would I be within my rights to take them to court to get my money back?

Annie Shaw replies

You might be within your rights, but whether it would be a good idea to do so, and whether you would be likely to succeed in getting your money, is another matter.

First there’s the issue of your relationship with your daughter and her husband. If you take them to court you can say goodbye to any remnants of familial affection between you. 

You don’t say if you have grandchildren, but if you have, don’t expect their parents to bring them round for Christmas if you’ve taken legal action against them.

Second, if you did take your daughter to court you would need to have at least some chance of proving your case. It sounds like it would be your word against hers. 

Get it in writing

Did she and her husband enter any legally-binding agreement in respect of the money? For instance, did they sign anything? What was the term of the loan, if any; what interest rate was payable on the loan? 

Under what circumstances could you demand repayment of the loan? If there were no specified terms, other than some sort of vague understanding that they might return the money “some time”, then your case is on shaky ground.

Read our guide on tax and giving money to children...

Loans can affect mortgages

You say that your daughter used the money for the deposit on a property. Mortgage lenders will usually ask for a declaration that the borrowers have no other loan commitments and that, if they do, the lender reserves the right not only to use the sum outstanding when doing “affordability” calculations but also to charge a higher rate of interest on the mortgage. 

Did your daughter and her husband tell their mortgage lender that they owed money to you? If not, why not? 

Did they genuinely believe you had given them the money for the deposit, or were they reluctant to pay a higher interest rate and therefore conveniently “forgot” to declare your loan to them, leaving an absence of any evidence that such a loan existed?

I am not sure that you have enough evidence to show that the money was handed over as a loan rather than a gift for your case to succeed. Taking your daughter to court could therefore be an expensive and fruitless exercise.

I believe your best bet is to keep on the right side of your daughter and son-in-law and appeal to their better nature to get the return of your cash – or at least as much of it as they can afford to return to you when they feel they are able. 

If you are genuinely short of money you may need to demonstrate this. Otherwise you are going to have to write off the money and put the whole unpleasant business down to experience.

What do you need to know before signing your property over to your children?

Informative, in-depth and in the know: get the latest money news with Saga Magazine. 

Avoid lending to family

Loans within families are fraught with pitfalls. In my opinion they are best avoided, but when they are entered into they need as much documentation – and perhaps even more – as loans between strangers, to avoid misunderstandings such as this one.

It is natural to want to help out family members with various expenses, such as setting up a home, but you do need to make the status of the transaction clear. For instance, not declaring a family loan to a mortgage lender could constitute fraud. 

If money is an outright gift rather than a loan, this fact should similarly be well documented if, for example, the donor is intending to use the manoeuvre to avoid inheritance tax. 

Keep records

It may seem like a good idea to leave matters unclear – for instance, you might make a substantial financial gift to a son or daughter but then be tempted dishonestly to try to claim it was just a loan if your offspring is facing divorce and their ex-spouse looks like making off with half the cash. 

You might think that it is not worth spending money on legal advice and getting the correct documents drawn up to record the transaction. 

However, neither of these motives for not keeping proper records is a good one, as potentially there could be far more problems and costs down the line, as you are sadly finding out. 

In the worst case, if you are found to have behaved less than honestly you and the other parties involved could find yourselves facing criminal charges for attempted fraud.

Giving money as a gift

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The opinions expressed are those of the author and are not held by Saga unless specifically stated. The material is for general information only and does not constitute investment, tax, legal, medical or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Always obtain independent, professional advice for your own particular situation.