What is the difference between a gift and a loan?
If you are receiving or giving money to someone, it is important to know the difference between a gift and a loan. If the parties involved in the transaction do not have a clear understanding of the difference and what is expected of them, confusion and disputes may arise in the future.
What is the difference?
A loan is the transfer of funds to a borrower which will need to be paid back to the lender at some stage. It usually involves the borrowed amount, known as the principal amount, and the payment of interest for the benefit of the lender. A loan could be construed both verbally and written, although written agreements are much preferred over verbal agreements.
On the other hand, a gift is voluntarily given to a party with no intention for the giver to receive anything back or expect something of equal value in return. Typically, there are no conditions or obligations to use a gift in a certain way , and the giver receives no benefit from the transaction.
There is no checklist of requirements to meet for the transfer of monies to be considered a loan. If a party wishes to assert that the money was a loan, they will need to show evidence (usually in writing), in support of that claim.
However, from a legal standpoint, a court will look for certain evidence such as a written loan agreement to verify the intention of a loan. In its absence, the following may become relevant to consider:
- Were the monies specifically transferred to one party?
- Was there a repayment plan?
- Was there an agreed interest rate for the repayment of the principal amount?
- Did the parties engage in any discussions to identify the monies as a loan?
If there is insufficient evidence to prove that the money was meant to be a loan, then the court may likely consider it to be a gift.
Furthermore, there is a ‘presumption of gift’ in certain situations including where monies are provided by a father to his children or spouse.
If you find yourself in a situation where there is an argument regarding whether something you have given or received is a gift or loan, consulting a lawyer can be crucial to navigate this legal situation. For example, you may have additional rights in equity that you may not be aware of.
Finally, in the absence of express terms to the contrary, a loan is usually repayable on demand and your legal rights to recover a loan expires within 6 years from the date of advancement of the loan.
The team at Brydens Lawyers can assist you with all matters concerning gifts or loans.
We can also assist you with preparing written loan agreements to avoid problems from arising in the first place.