Is It a Loan or A Gift? Why You Should Know the Difference

Last updated on August 4, 2023

Man giving woman a bag of money

In 2023, a dispute arose between the former chairman of a Taoist temple who claimed that his contribution of over $1 million to the temple was a loan, and the defendants who countered that the sum was a donation instead.

This article will discuss the differences between a loan and a gift (including donations), and what to do if you ever find yourself embroiled in a dispute similar to the one above. It will explain:

In particular, this article focuses on one-off instances of an individual loaning money, as opposed to lending money on a professional basis. The latter situation could cause the lender to be in violation of the Money Lenders Act by engaging in unlicensed money lending, which is not the focus of the present article.

What is a Loan? 

A loan can be defined as money, property, or other material goods given by one party to another party in exchange for future repayment of the loan value amount on certain terms. For example, the lender might impose interest to be paid alongside the principal loan sum.

In the case of a loan, the parties must intend to be legally bound by the transaction and there must be a clear intention of repayment. This may be evidenced by an IOU, a written agreement that recognises the existence of a debt that one party owes another. A clear intention of repayment may also be evidenced via witnesses, text messages, and email exchanges:

  • Witnesses: A witness who was present at the signing of the loan agreement may be called upon to give evidence that a loan has been made with the intention of repayment, and that the loan agreement was signed without any duress, undue influence or mistake. In this regard, the loan agreement or IOU may include the witness’ name, NRIC number, address, contact number, and signature.
  • Text messages: A text conversation clearly stating the amount of money to be loaned and a promise of repayment could constitute evidence of intention of repayment.
  • Email exchanges: An email chain between two parties specifically discussing the details of the loan agreement – such as the loan repayment date and repayment method – could constitute evidence for the purpose of proving a clear intention of repayment.

To find out more about IOUs and how to draft one, do refer to our article on IOUs in Singapore.

What is a Gift? 

A gift can be defined as money or personal property voluntarily given to another party, in circumstances where the giver does not intend for the recipient to return or repay the property or money given (as opposed to a loan).

Furthermore, the giver does not gain any benefit from giving the gift. Hence, the transaction can be said to be charitable in nature. Examples of gifts could include cash, property, stocks, and other types of assets.

Are donations considered gifts? 

Generally, donations are made unconditionally and voluntarily by the donor, who does not expect any benefit in return. These are known as outright donations which typically fall under the category of gifts. However, if the donor makes a donation with the expectation of receiving a benefit (and would not have made the donation if there was no benefit to be gained), then the sum would not be considered an outright donation that falls under the category of gifts. 

On the other hand, gifts and donations differ in the sense that outright donations are not subject to GST, while gifts given to employees during festive occasions and special occasions may be subject to taxes. Do note that such gifts are only taxable if they exceed the exemption threshold of S$200.

In deciding whether a sum of money is a loan or a gift, the courts will typically begin by looking at the nature of the relationship between the parties. There are two broad categories of relationships that have been recognised by the courts: 1) domestic and social relationships, and 2) business relationships.

Domestic and social relationships

Examples of domestic and social relationships include relationships between family members (e.g. mother and child) and relationships between friends. In such a relationship, the legal presumption is that a gift was intended between the parties.

Therefore, in attempting to claim that money was loaned, a party in a domestic or social relationship must produce evidence to prove that the money given was a loan and not a gift, for example, a signed loan agreement. For instance, a parent providing money to a child as a family loan for the child to start a business would constitute a domestic relationship.

Business relationships

Examples of business relationships include relationships between business partners and commercial parties. In such a situation, the likely presumption is that a loan was intended between the parties. Therefore, the party in a business relationship claiming that money was gifted must produce evidence to prove to the court that the money given was a cash gift and not a loan.

Even though the above might seem like distinct categories, there may be situations where the lines between these two relationship types might be blurred. For example, the distinction may become less clear where family members or friends are running a business together.

Some other factors that the court might take into consideration in deciding whether a sum of money is a gift or a loan include the actions of the respective parties involved. For example, if the recipient makes the first few initial repayments on time as agreed but proceeds to default on subsequent repayments, the recipient is unable to turn around and allege that he/she believed that the sum was a gift, since he/she had made repayments at first. 

On the other hand, if a party continues to “lend” money to the recipient, even though the recipient has defaulted on the repayment of the previous “loans”, then it is unlikely that the lender is able to claim that the sum of money was a loan and not a gift, especially where there are no loan agreements in existence. This was what happened in a 2023 case of a businessman who lost $4 million to a company he had allegedly lent the amount to. Even if the company had needed the money urgently, the court concluded that there was no commercial reason for the businessman to act in haste and so increase his own risk in the transaction by lending the company in default fresh funds equal to three times the amount in default. He also had no proof of written loan agreements and, therefore, failed to prove that the $4 million given was a loan. His lawsuit against the company was dismissed.  

Additionally, the amount of money given compared against the totality of the donor’s property could be a relevant factor in assessing whether a loan or a gift was intended. Where the sum given is insignificant compared against the totality of the donor’s property, it is likely that the sum was intended as a gift that need not be repaid). To illustrate, where the totality of someone’s assets (e.g. cash, property, business assets) is valued at $1 billion and he or she transfers a sum of $10,000 to help out a friend, it is highly unlikely that the sum of $10,000 would be considered a loan that needs to be repaid (though of course, this is still dependent on context). Other factors include the presence of documentation evidencing a loan (e.g. a written loan agreement) and whether there was an expectation of repayment.

However, even if there exists written documentation to support the creation of a loan, there is a possibility that it could be construed otherwise. In the dispute involving the Taoist temple, a loan acknowledgement had been created. In spite of this, a question arose as to whether the loan acknowledgement was intended to be a proper record of the loan, or if it was merely a facade (to placate the claimant’s wife, who was unhappy that he had been pouring so much money into the temple) and therefore inadequate in proving the parties’ intention for a loan. Hence, it remains crucial for parties to make as clear as possible whether a loan or gift is intended at the outset. 

What Practical Steps Can I Take to Avoid a Dispute That Arises From Whether a Sum of Money is a Loan or a Gift?

If you are lending someone a sum of money and you intend for it to be repaid, it is important to record the agreement in writing. A written agreement would help to ensure that the borrower does not view the sum to be a gift/donation, reduce misunderstandings about the terms of the transaction and limit the possibility of future disputes over repayment obligations.

When drafting the loan agreement, you should record the terms of the agreement as clearly as possible. Here are some of the key terms that you should include in your loan agreement:

  • Party details: This refers to the borrower and lender’s full name, address and any other relevant contact information. This ensures that the parties to the transaction are clearly identified. If there are multiple borrowers or lenders, do include the identity information of all of them.
  • Loan amount: In stipulating the loan amount, it is important to be aware of the differences between the Principal (the amount advanced to the borrower) and the Loan Amount (the amount to be repaid). Additionally, commercial loans will generally include administrative fees and charges in a Loan Amount. It is important to be clear on the exact Loan Amount you are owed from the outset so that you know how much you can expect to be repaid. This would prevent disputes from arising later on. 
  • Interest: If you intend to charge interest on the loan, you will need to stipulate the rate of interest to be applied and how it is to be calculated (e.g. simple or compound interest).
  • Loan repayment details: This includes the specifics of when and how the borrower is to repay the loan. For example, you may want the loan to be repaid in the form of a single lump sum repayment by a set date, instalment payments over a specified period of time, or perhaps a combination of both. You could also include the details of the bank account that you want the money to be transferred to. Specifying the details of loan repayment allows you to choose your preferred method of payment and altogether makes for a more fuss-free loan repayment experience. 
  • Loan term: This refers to the period of time that the money is being loaned over. The loan term could be a specific date or a period of time, i.e. 36 months. Specifying the loan term is important as it confirms the date on which the loan amount must be fully repaid.
  • Security: This would be a relevant consideration if you are lending a large amount of money. In such a situation, requiring some form of security can help protect your interest should things go awry. With a secured loan, you can seize the asset that has been pledged as collateral should the borrower fail to repay the loan. Examples of such assets include physical assets such as property and vehicles, and financial assets such as stocks and bonds. On the other hand, if your loan is unsecured, you will not be able to claim any asset as collateral in the event that the borrower fails to repay the loan. Hence, making an unsecured loan does pose a risk to the lender, especially if a large sum of money is being lent. 
  • Default: This sets out what will happen if the borrower fails to make the required payment or breaches the terms of the loan agreement. Examples include the borrower having to pay additional sums such as increased interest or late penalty fees.

Do note that this is not an exhaustive list, and there may be other terms that might need to be included depending on the particular circumstances of your case. In this regard, it is important to adapt the terms in your loan agreement accordingly to best suit your needs.

If you do not have a written loan agreement, other forms of evidence such as emails and text messages can be used to prove that the parties had intended for a loan to be made. However, a written loan agreement still remains one of the strongest methods to prove the existence of a loan. While emails and text messages might be vague, incomplete and leave room for interpretation, a signed loan agreement is often unequivocal in expressing an intention for a loan between the parties.

Furthermore, it is important to keep detailed records of transactions made. This can be done by transferring funds via electronic banking (instead of cash payments) and keeping records of the relevant accompanying bank statements. This would also help to minimise disputes over sums of money that remain due and owing.

In the 2023 case of the businessman who lost $4 million (discussed above), while he claimed to have entered into verbal loan agreements with the company, these were considered inadequate to prove the existence of the loans and the court focused instead on his failure to put the loans in writing. This case further underscores how important it is to have strong evidence to support your claim that a loan was intended. 

To conclude, a person who gives a gift does not intend for it to be repaid, but a person who makes a loan harbours the expectation that it will be repaid in accordance with certain terms. If you require further guidance on the differences between a loan and a gift, or if you find yourself in a related dispute, do seek legal advice from an experienced civil disputes lawyer.

If you wish to make a loan to someone, a civil disputes lawyer can also help you draft the loan agreement in a way that best protects your interests. In the event that the borrower fails to repay the loan, a civil disputes lawyer can advise you on the best course of action to take, and, if necessary, commence an action against the borrower. You can find a civil disputes lawyer that best suits your needs through our Find a Lawyer service.