Most of us will at some point in our lives need to borrow money from friends or family. When it’s for a couple of rounds down the pub it’s unlikely to cause big issues if you forget to repay the money – most people just remember to leave them out in the next round of drinks and are less willing to help out again.

But if you’re fortunate enough to be in a position to be able to loan thousands of pounds to someone, it’s worth pausing to think about how you are going to recover the money if things head south. Perhaps your friend loses their job, gets divorced or moves countries. It’s also a fact of life that relationships can deteriorate over the years.

The law

When money is lent between businesses, there is an assumption that there is a contract in place (implied or written) for the receiving party to repay it.

When friends and relatives loan money to each other, the law presumes the money has simply been gifted to the recipient. Therefore, when Adam lends his best mate Ben £25,000 to help Ben pay off some student debts, the law presumes Adam has generously gifted Ben the money and Adam is highly unlikely to recover the money successfully through the Courts. This is great news for Ben. But it’s unlikely Ben will be getting any Christmas cards from Adam any time soon.

However, the presumption can be rebutted where there is something in writing between the friends and relatives.

So, had Adam written to Ben stating he was willing to loan Ben the £25,000 with zero per cent interest strictly on the basis it was repaid within 5 years at £5,000 a year, then Adam is far more likely to succeed in recovering some of the money from Ben in the event Ben conveniently goes backpacking for 3 years.

 Points to consider when lending money to friends and family

  1. Assume you are going to fall out with your best friend or favourite niece in the next few years in a big way.
  2. At the very least, before lending significant sums of money you should write to the other party stating the money is a loan and the exact time in which you require it to be repaid to you.
  3. Make sure you have a paper trail. Ensure the other party accepts the terms on which you are lending them the money in writing. A signed letter would be great. If this is not practical, an exchange of emails or social media messages can sometimes be just as good.
  4. Make all payments to the recipient electronically and reference the payments as a loan. Likewise, it’s best if the recipient makes the repayments to you electronically.
  5. Ideally instruct a lawyer to draft up a simple but formal loan agreement for you. The loan agreement will set out the amount of money loaned, the duration of the loan, any interest payable, any security for the loan (i.e. a charge or restriction on the title of the recipient’s property), a repayment schedule and various provisions as to what happens if and when the recipient defaults.
  6. If you are lending money for someone to use towards the purchase of a property, consider obtaining a Declaration of Trust from a lawyer. This document will set out exactly how the property is owned and what happens when either party wants to recover their money from the property. These documents are great at foreseeing the various issues which face joint home owners when relationships fall apart and disputes arise.

 I have acted for many clients who have been generous with their money and for various lucky recipients. In many of the circumstances the parties were either close friends, romantic partners or relatives simply trying to help someone out.

As a disputes lawyer I often get involved when there has been a lack of written terms between the parties. Where there is the case, the Courts can consider witness evidence from the parties. But it is surprising how the memories of two parties can differ years down the line, particularly when there are large amounts of money at stake.

Daniel Crate

Associate Solicitor – Dispute Resolution Team

rhw Solicitors LLP

June 2021

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