The 'bank of mum and dad' is probably the most used bank anywhere in the world. However, all too often, loans between family members are not formally recorded. This creates complications if family members later fall out or one party dies. The issue then is whether the advance was a gift or a loan?
At law, there is 'presumption of advancement' which results in loans between family members being treated as gifts unless there is evidence to the contrary. So someone who thought they would be repaid, could actually miss out.
Also, if money is advanced to assist with the purchase of a property, and it is not properly documented, the lender could be entitled to a proportionate share of the sales proceeds of the house, rather than the set amount of the loan.
In the recent case of Chang v Lee, Mr Chang advanced money to his niece, Ms Lee, to assist her with the purchase of a property in Auckland. The terms of the advance were never formally recorded. The relationship eventually became strained and an argument over the money ensued. Ms Lee claimed, amongst other things, that the money was a gift, not a loan. Mr Chang of course argued that the money was a loan which required repayment.
The Court of Appeal found that in the absence of an agreement about the terms of his advance, Mr Chang was entitled to an equitable interest in the property.
That meant that instead of being entitled to repayment of the amount advanced, he was entitled to a proportion of the sale proceeds, equal to his contribution to the original purchase price. Given the steady inflation of prices in the Auckland property market, Mr Chang would have made a nice return.
Every case turns on its own facts. However, the lesson is clear. It is important to formally record any loans you make with family members, friends or anyone else.
If you don't want your loan to be treated as a gift, and if you don't want someone being able to benefit in the capital gains you made from your property, talk to us before you lend (or receive) any money.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.