Dare to presume

The Court of Appeal has recently dismissed a mother’s claim to recover a loan which she made to her son to assist with the purchase of the son’s property. 

The claim was dismissed on the basis that there was no evidence that the payment from the mother was intended to be a loan rather than a gift. 

The legal principle known as the ‘presumption of advancement’ was relied upon in defence of the claim.  Although this legal presumption is due to be abolished when Section 199 of the Equality Act 2010 (finally) comes into force, it is a presumption that is still applied by the Courts.  And it is a presumption that is likely to be referred to in legal disputes for many years to come and which family members must think about very carefully when assisting other family members with, for example, the purchase of property or providing other financial help.

The Court of Appeal case of Farrell v Burden is a cautionary tale. Mrs Farrell brought a claim stating that she had loaned her son a total of £170,000 in 2005 to buy a property.  The son died in 2016 and his Will made no provision for his mother.  His estate passed to his wife and to various charities. The son’s widow denied that the mother’s payment had been a loan and argued that it was a gift. 

Mrs Farrell therefore brought a claim against her son’s estate seeking repayment of the alleged loan.  The son’s widow contested the claim. Neither side had any documentation to support their respective views.

At the first County Court hearing in June 2019, the Judge ruled that Mrs Farrell did not have any proof that the payment had been a loan rather than a gift.  He referred to the presumption of advancement which is a legal presumption that arises within the context of certain close relationships, including parent/child relationships.  In simple terms, it is a presumption that where money or property is transferred within the context of a close relationship, then the Court is entitled to presume that, in the absence of any other evidence, the transfer is to be construed as a gift. The key words here are “in the absence of any other evidence”.  The problem for Mrs Farrell was that she had no evidence that her payment was a loan. Her claim therefore failed. Not only did the claim fail, but she was also ordered to pay the estate’s costs reported to have been in the region of £100,000. 

Mrs Farrell appealed to the Court of Appeal, protesting that the County Court had got this wrong. But the Court of Appeal upheld the County Court decision and emphasised the fact that there was nothing in writing to support Mrs Farrell’s claim that the payment had been a loan.

The lesson from this case is clear and it is a lesson that has emerged from many previous cases. And yet the provision of financial assistance amongst family members is something that continues to be the source of bitterly contested disputes.  Often there is no discussion about whether the payments are being made as gifts or as loans.  Even if discussions do take place, it is rare for anything to be documented. 

Documentation of a loan can be complex and expensive but it certainly does not need to be so.  Taking the example of Mrs Farrell, if there had been a short written note confirming that the payment was being made (and received) as a loan, it is unlikely that she would ever have become embroiled in litigation. Even if the matter had been referred to the Court, she would certainly not have been on the receiving end of an adverse judgment and a £100,000 costs bill.

If you are lending money to your children or to other family members, think carefully and be aware of the potentially troublesome legal presumption of advancement.  Make sure that, at the very least, you create and retain evidence that the payment is a loan and not a gift.  This may seem awkward, particularly when you are dealing with close family members, but, as can been seen from the Farrell case, family relationships and personal circumstances evolve and protecting yourself now can prevent a great deal of painful and costly strife in the future. 

If you have any questions about this article please contact Andrew Turner on 01242 586841 or aet@hughes-paddison.co.uk