Informal family loans can be more trouble than they are worth

I bought a house with my two sisters in 2019. We agreed that they would pay me back the money I used to buy the house with them. They are now refusing to buy my share of the house as agreed. Can I force them to buy my share?

Mr M. McC.

I suppose the first response of your sisters will be: “prove it”.

I am always surprised by the number of people who are prepared to enter informal agreements involving very significant financial arrangements without a shred of paper to back up the terms and conditions. Assuming most people do not have the sort of loose cash hanging around that would encourage them to agree to such deals without a second thought for the safety of their savings, I have to put it down to a very ill-advised trust in the friends or family involved.

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To be fair, I am always equally surprised that family members would risk the sort of bitterness that rows over money can cause by agreeing such a deal and then simply refusing to honour it.

Put simply, if someone is minded to put up cash with no security or contract of any form, then they need to be aware that they are doing so at the risk not only of no return but of the loss of their original capital.

In this case, it is unclear if all three of you are named on the deeds of this property or whether you are a silent partner.

If it is the first, at least you have an asset to cover the investment and, if you chose to, you could go the legal route to try to force its sale to liquidate your investment. Of course, that word ‘liquidate’ has another meaning and one you would do well to consider before following this route, as the legal costs involved could prove very expensive, leaving you with little if any of your original sum at the end of the day even if you were to prove successful in the case.

If you are a silent partner here, with no name on the deeds, then you are simply out of luck. You trusted people you should not have, you have no paper to back up the arrangement and therefore no opportunity to force your sisters’ hands in recovering your money.

To preserve family harmony, it might be best to inquire first if there is some reasonable if frustrating underlying reason behind your sisters’ refusal to pay you back the money you put up for this purchase. Perhaps they simply do not have it or maybe paying you at this point might risk them falling into arrears on any loans they have taken out to buy the property.

Then there is also the issue of price. You don’t say one way or the other here but it would be one thing if your sisters were simply repaying you the money you put up for the purchase and another entirely if you are looking to be bought out at today’s market price. What was their understanding at the outset?

There might be all sorts of reasons for refusal to pay and it makes sense to figure out the motivation behind it before taking any further steps that could generate discord and cost.

[ Can I lend half the proceeds of my house sale to a friend without Revenue involvement? ]

In the last scenario above, as long as all parties can agree that it is today’s market value that is relevant, sense dictates that you get a formal valuation done on the property – at relatively minor cost – or take the average of two or three valuations, whichever works for the three owners.

More broadly, it makes sense for people to put in place basic documents covering the terms and conditions of intrafamily loans or lending between friends.

A simple agreement in writing, signed by all parties and witnessed by a third party – ideally a solicitor but it could be anyone seen as an honest broker and not closely connected with either party – can be a reassurance to all sides. It should include who has put up how much and for how long, plus the status of each investment. Are some of them loans and others investments? It should also clarify whether repayment includes interest (bearing in mind that failure to do so can have gift tax implications) or at market rates (which will likely involve capital gains tax), or simply repayment of the initial capital sum.

It is not a sign of a lack of trust. It just sets parameters and clarity so that everyone knows what has and has not been agreed in a grown-up adult fashion.

Especially in the current housing market, the Bank of Mum and Dad has come into its own with parents offering or agreeing financial support to ensure their children’s finances stack up sufficiently to be able to buy a home. For some it is a gift and if they can afford that and want to do so, well and good. But for others, the money put up is an essential part of savings on which the parents expect to rely in part when they retire. They cannot afford to simply give it away nor do they want to rupture their family over a misunderstanding.

It also provides some recourse where relations break down or in situations like yours where you are clear that there was an agreement your sisters would buy you out of your share of this property and your sisters clearly have a different view now, whatever they may or may not have understood at the outset.

Casual family financial arrangements are ubiquitous in Ireland and the vast majority are harmonious with everyone understanding what are gifts and what are loans, and everything being concluded with no friction at all. But not always, as you have found, and that is why putting just a little formality on things can offer peace of mind all round.

Please send your queries to Dominic Coyle, Q&A, The Irish Times, 24-28 Tara Street Dublin 2, or by email to dominic.coyle@irishtimes.com. This column is a reader service and is not intended to replace professional advice