Some parents may provide money to their children to assist them to purchase their first car or even their first home. In some instances, this money is a gift whereas in others the parents expect to be repaid.
There is a presumption at law that any money advanced from a parent to their child is a gift and not a loan. This presumption can be set aside if it can be clearly shown (usually through a formal loan agreement) that there is an agreement in place between the parties confirming that the money is a loan and will need to be repaid.
If you are a parent and wish to provide money to your child however expect to be repaid, then it is a good idea to document this arrangement by entering into a loan agreement with your children. Three reasons why you should do this are as follows:
- You can specify the terms of the agreement such as the amount of the loan, when the loan is to be repaid, if interest on the principal loan amount is payable, what the loan can be used for as well as any other terms that may be applicable.
- You can document the type of security (if any) securing the loan. This means that if the borrower defaults, you have security which may be used to recover some if not all of the money you have lent. The type of security which will be applicable will depend on your specific circumstances however common forms of security are a registered mortgage over the borrower's property or an unregistered mortgage along with a caveat registered on the borrower's property.
- Documenting the arrangement in a loan agreement is evidence that the money was provided as a loan and not by way of a gift (provided that the loan agreement has been drafted correctly). This may become important in the distribution of a lender's estate to show that this money needs to be repaid to the estate.
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.