When Sarah's parents lent her $80,000 for a house deposit in 2019, everyone agreed it was a loan, not a gift. They shook hands, Sarah promised to pay it back "when she could," and everyone felt good about the arrangement.

Five years later, Sarah's relationship ended. During the relationship property split, her ex-partner's lawyer argued that without any written agreement, the $80,000 should be treated as a gift from Sarah's parents to both Sarah and her partner. This meant her ex was potentially entitled to half, $40,000 that her parents never intended for him to receive.

Simultaneously, Sarah's parents were applying for a residential care subsidy. Work and Income asked them to account for all their assets and any money they'd "gifted" in recent years. Without a formal loan agreement, they couldn't prove the money was a loan rather than a gift, potentially affecting their subsidy eligibility.

This scenario plays out across New Zealand more often than most families realise. According to relationship property lawyers, informal family loans frequently become contentious during separations because there's no clear documentation showing whether money was gifted or lent.

Here's why proper documentation matters:

Relationship property protection. Under New Zealand's Property (Relationships) Act 1976, relationship property is generally divided equally when couples separate. If your child's partner can argue that money from parents was a "gift," it may need to be shared. A properly structured loan agreement clearly establishes that the money remains your child's debt, not a shared asset.

Estate planning clarity. When parents pass away, informal family loans often cause disputes between siblings. Did Mum and Dad intend for that $100,000 house deposit to be a loan, a gift, or an advancement on inheritance? Without documentation, family members may have very different recollections, leading to costly legal battles and damaged relationships.

Tax implications. Lending money to family members can have tax consequences, particularly if you're charging interest or if you later "forgive" the debt. The Inland Revenue Department has specific rules about related-party lending, and proper documentation helps ensure you're meeting your obligations.

Work and Income considerations. If you're approaching retirement age and may eventually need government support, you need to prove that money transferred to family members was a loan, not a gift. Work and Income has strict "deprivation of assets" rules that can affect your eligibility for residential care subsidies if they determine you've gifted assets to avoid means testing.

Bank requirements. If your child needs to refinance or is applying for additional lending, their bank will want to see documentation of any family loans. Undocumented loans may not be recognised by lenders, or worse, may be treated as gifted equity that affects lending calculations.

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