Gift or loan? A Christmas it easy to tell the difference, but it's not so easy when it comes to gifts of cash for a home deposit the distinction may not be so clear. With Christmas approaching, ‘tis the season for giving and receiving. For most of us, the gifts under the tree will be fairly ordinary – maybe that perfume we’ve hinted at, the next book in that series we’ve been reading or perhaps a special bottle of wine. Others though, will receive gifts that are much more substantial such as, for example, from the ‘bank of Mum and Dad’.

It’s no secret that with house prices soaring as they have been over the last 12 months, any help towards building that deposit will go a long way towards securing that first home, whether that comes in the form of a cash gift, a loan or a family guarantee.

For those parents or other benefactors that are minded to advance their children or significant others a lump sum to use towards buying a home, it would be reasonable of them to insist that there are measures in place to ensure that the money they advance will stay ‘within the family’, notwithstanding the relationship status of the beneficiary at any point in time.

If down the track the relationship between the beneficiary and their spouse breaks down (whether married or de facto), these types of advances – whether they are gifts or loans – will be relevant to their property settlement.

A gift or a loan?

Where money is advanced and there is an expectation that it will be repaid, then a loan deed or registered mortgage will help to verify this. Careful consideration should be given to the terms of the loan deed or mortgage as they will have a bearing as to when the statutory limitation period for recovery begins to run. Evidence of repayments having been made in accordance with the loan deed or mortgage go a long way to proving that the advance was in fact a loan, and not a gift. Where the advance is treated as a loan, it can reduce the property pool to be divided between the parties, sometimes significantly – this is usually to the benefit of the recipient.

Where the advance is treated as a gift, it can mean an adjustment in the recipient’s favour, where the property settlement may have otherwise been equal. There is a greater likelihood that advances will be treated as a gift where there has been no demand for repayment until after the beneficiary has separated from their spouse, or where it is clear that the benefactor knew the beneficiary would never have had the means or resources to have been able to repay it.

Its not unusual for donors to become involved in the legal proceedings between the separated parties, either as a witness or intervenor. This can be expensive and time consuming.

Creating a financial agreement

Rather than go to the cost and trouble of having a court determine whether a cash advance is a gift or loan, parties can make up their own rules by entering into a financial agreement. This can be done at any time before, during or after a marriage or de facto relationship. It can say, for example, that if the parties separate, any money that either party has already received or may receive in the future (from parents for example), is treated a certain way. It could say that those advances are to be repaid to their parents before the rest of the parties’ property is divided between them.

Financial agreements have long been seen as a quasi-insurance policy in that they can offer asset protection to the parties. Entering into a financial agreement that provides for money advanced from the bank of Mum and Dad to be remitted back to them in the event of their relationship breakdown can also be considered somewhat of a gift back to Mum and Dad, by assuring them that their money will always remain in the family. Whilst there are some limited circumstances in which financial agreements may be set aside by a court, they are more often than not the best form of protection available for parties wishing to pre-determine a property settlement in the event of separation.

For advice regarding how a financial agreement might protect you or someone you know, contact Family Law specialists, Joelene Seaton or Aleena Mills, of MBA Lawyers.