Gift or loan? Director Lee Stutt runs through how Courts decide what a payment meant years later

A parent hands over £40,000 for a house deposit. A friend funds a business. A relative pays off a debt.

Nothing is signed. Years later the relationship breaks down, and the person who paid says it was a loan. The person who received it says it was a gift.

This happens in both directions, and the law in England and Wales has a clear approach. The court asks what both sides intended when the money changed hands. It works that out mainly from the documents and what people did at the time, not from what each side says once they’ve fallen out.

THE PROBLEM RUNS BOTH WAYS

The first version is the one most people picture. Something that was plainly a gift at the time is recast as a loan once the family or the friendship has gone sour. The “loan” often has no repayment date, no interest and no paperwork, and the person who paid asks for it back for the first time years later.

The second version is the reverse. Someone who genuinely lent money is told it was always a gift and they’ve no right to it back. Or a gift is made that makes no sense for the person giving it, such as a large sum handed over by an elderly or vulnerable relative, and the family wants to know if it can be undone.

The legal question is the same each time: what was this payment meant to be when it was made?

WHO HAS TO PROVE IT?

When one person pays money to another and there is nothing to show why, the law starts from an assumption. Between friends, cohabiting partners and most other relatives, the starting point is that a payment wasn’t meant as a gift. The person who received it has to show that it was. The leading case is Seldon v Davidson [1968] 1 WLR 1083, and the High Court applied it recently in Thomas v Porter [2023] EWHC 983 (KB), which also confirms that there’s no automatic presumption of a gift between unmarried partners.

There’s also a counter-assumption, the presumption of advancement. Traditionally it treated payments from a father to a child, or a husband to a wife, as gifts. Courts treat it as weak where it doesn’t match how families actually behave, and it gives way easily to evidence.

These presumptions matter far less than people expect. In Durrani v Coe [2024] EWHC 2912 (KB), the High Court said the burden of proof only decides a case where the evidence on each side is evenly balanced. That’s rare. Almost every time, the judge simply decides which explanation is more likely on all the evidence. The presumptions are a fallback for when the evidence runs out, not a substitute for it.

THE EVIDENCE THAT ACTUALLY DECIDES THESE CASES

The court wants to know what the payment was really meant to be. In practice that means looking at what was said and done around the time, and what happened afterwards.

Documents from the time. Bank statements show the amount, the narrative and whether the payment was a one-off or part of a pattern. Texts, emails and WhatsApp messages are often the most revealing material of all, because people write “thanks for the loan” or “no need to pay me back” without thinking about it. If the money went towards a property, the mortgage lender may have asked for a signed gift letter confirming that no repayment was expected. Anyone who signed that letter will struggle to say later that they always meant it as a loan.

Tax and financial records. A payment that appears as a loan in someone’s accounts, or that was reported as a gift for inheritance tax purposes, tells a story. So does a will that treats the money as an advance on an inheritance, or as a debt that’s still owed.

Conduct over the following years. Regular or part repayments, interest, reminders and security all point towards a loan. Years of silence, followed by a demand on the day the relationship ends, point the other way.

Witnesses. The best evidence comes from people who were actually present or involved at the time, and from advisers such as solicitors, accountants and financial advisers whose file notes were made when the payment was fresh. Evidence that just repeats what someone else was told carries much less weight.

Consistency. Judges look hard at whether someone’s account has changed over time. In Durrani v Coe the court criticised evidence that wasn’t consistent, where some points were raised only years after the events. A story that develops as the dispute does is hard to believe.

WHEN THE GIFT IS THE PROBLEM

Sometimes the worry isn’t that a gift has been disguised as a loan, but that the gift should never have been made. If the giver trusted the recipient and the gift is the kind that calls for an explanation, the law can treat it as the product of undue influence. The recipient then has to show the giver acted freely. Independent advice helps, but it doesn’t settle the matter, and its quality counts, particularly where the giver is elderly or vulnerable. This is a separate area with its own tests, and it needs its own advice.

WHY OLD PAYMENTS CAN STILL BE LIVE

Most money claims must be brought within six years. Many people assume a payment made a decade ago is therefore beyond challenge.

Not necessarily. Under section 6 of the Limitation Act 1980, the usual six-year limit doesn’t run against a loan that has no fixed repayment date and is not conditional on a demand. Time only starts to run when the lender makes a written demand for repayment. Loans repayable on demand are treated differently, and the position depends on the exact terms agreed. Anyone bringing or defending an old claim should take advice early.

PRACTICAL STEPS

If you’re giving or lending money, write it down at the time, even if it’s just a short email saying whether it’s a gift or a loan and what you expect in return. It costs nothing and heads off most of the later argument.

If you’re receiving money, keep the message or letter that came with it, and say in writing what you understand the position to be.

If a dispute has already arisen, gather the bank statements, messages and any adviser’s records before positions harden. Don’t assume that time has settled the question, either way. If the money went into a property, there may also be a separate question about who owns what, which needs its own analysis.

These disputes are often between people who’d rather avoid a trial, and the evidence is frequently clear enough to reach a sensible resolution without one.

QUESTIONS PEOPLE ASK

Can a gift be turned into a loan years later? Only if the evidence shows it was a loan when the money was paid. A later change of mind isn’t enough.

Does a loan need to be in writing? No. A loan can be oral or inferred from conduct, but it’s harder to prove without writing, and the court will look closely at everything else.

Is there a time limit for recovering a loan? Usually six years. But under section 6 of the Limitation Act 1980, a loan with no fixed repayment date and no demand condition is treated differently, and time only runs from a written demand.

Who has to prove it? Usually the person who received the payment has to show it was a gift. In practice, though, the court decides on the balance of the evidence, and the burden only matters if the evidence is exactly equal.

HOW STUTT ASSOCIATES CAN HELP

Whether you’re trying to recover money you say was lent, or defending a claim that a gift was really a loan, the outcome will turn on the evidence, and on how early it’s gathered and presented.

At Stutt Associates, we deal with disputes about money passing between family, friends and business associates. We can assess the documents, advise on where you stand and, where it makes sense, help you reach a resolution without the cost of a trial. If you’re facing a dispute about a historic payment, speak to us early.