Index of the Article:
The Audio Summary of the Key Points of the Article:
Can You Loan Money to a Family Member Tax-Free in the UK?
The Straight Answer
Yes, you can loan money to a family member tax-free in the UK, but there are certain tax rules and potential implications to be aware of. Loans themselves are not taxable, but depending on how the loan is structured—such as whether interest is charged, the amount involved, and how repayments are handled—there may be tax considerations, including inheritance tax (IHT), income tax, or even capital gains tax (CGT) in some cases.
Understanding the Tax Rules on Family Loans in the UK
Loans between family members are common in the UK, whether it’s helping a child buy a first home, supporting a sibling through financial hardship, or assisting a parent with care costs. However, to avoid unintended tax liabilities or disputes, it’s essential to structure the loan properly.
1. Is a Loan Considered a Gift for Tax Purposes?
A loan is not considered a gift, meaning it does not immediately attract inheritance tax (IHT) under the seven-year rule that applies to gifts. However, if the loan is later forgiven (i.e., turned into a gift), it could then be subject to IHT rules.
✅ Key rule: If you pass away within seven years of forgiving the loan, it may be subject to inheritance tax if your total estate exceeds the £325,000 nil-rate band.
2. Charging vs. Not Charging Interest: Tax Implications
Whether or not interest is charged on the loan affects tax liabilities:
Loan Type | Tax Implications |
Interest-free loan | No direct tax consequence, but potential IHT risk if forgiven. |
Loan with interest | The lender may have to pay income tax on the interest received. |
If you charge interest, HMRC may consider you as earning taxable income. The lender must declare this interest on their Self-Assessment tax return if it exceeds their Personal Savings Allowance (£1,000 for basic rate taxpayers, £500 for higher rate taxpayers in 2024/25).
However, if no interest is charged, there are no income tax implications for the lender or borrower.
3. Loans and Inheritance Tax (IHT)
If you lend money and pass away before the loan is repaid, the outstanding loan becomes part of your estate, potentially increasing IHT liability.
If the loan is written off (i.e., forgiven), it is treated as a gift and subject to IHT rules if you die within seven years.
💡 Example: If a parent lends their child £50,000 interest-free for a house deposit and dies within seven years after forgiving the loan, it may be included in their estate for IHT purposes.
4. Capital Gains Tax (CGT) and Loans
In most cases, loans themselves do not trigger Capital Gains Tax (CGT). However, if you transfer an asset (e.g., a property) instead of cash, CGT may apply on the gain if the asset has increased in value.
💡 Example: If a father lends his son £100,000 interest-free but secures the loan against an investment property, and that property is later sold, CGT may apply on the capital gain of the property.
Common Real-Life Loan Scenarios and Their Tax Treatment
1️⃣ Parents Lending Money for a Child’s House Deposit
If structured as a loan, there is no immediate tax implication.
If the loan is later forgiven, it may become a Potentially Exempt Transfer (PET) for IHT purposes.
2️⃣ Loaning Money to a Sibling for Debt Repayment
If interest-free, it’s usually tax-free.
If interest is charged, the lender may need to declare the interest as taxable income.
3️⃣ Lending Money to Elderly Parents for Care Costs
No tax applies if it’s a loan rather than a gift.
If the loan is forgiven, it might affect their estate valuation for care home financial assessments.
How HMRC Views Family Loans: Key Considerations
1. Is it truly a loan, or is it a disguised gift?
HMRC may scrutinize transactions if a loan is given without formal documentation, especially if no repayments are made.
2. Is there a written agreement?
A written loan agreement helps clarify that the money is a loan, not a gift, reducing the risk of tax complications.
3. How does it affect the lender’s estate?
If a lender dies before repayment, the loan becomes part of their estate, possibly increasing inheritance tax liability.
✅ Best Practice: Always document the loan with a simple loan agreement specifying the amount, repayment terms, and interest (if any).
Best Practices for Loaning Money to a Family Member Tax-Free
Now that we’ve covered the tax rules, let’s dive into how to structure a family loan properly to avoid potential tax liabilities, misunderstandings, or financial disputes. While family loans are common, they can become messy if not handled correctly.
Why Formalising a Loan Matters
A handshake agreement might seem fine when lending to family, but problems can arise if:
The borrower fails to repay or disputes the amount.
HMRC questions whether it’s a loan or a gift for tax purposes.
The lender passes away before the loan is repaid, leading to confusion over inheritance tax (IHT) obligations.
To avoid complications, documenting the loan properly is highly recommended.
1. Creating a Legally Binding Loan Agreement
A written loan agreement protects both the lender and the borrower. It should include:
Loan amount – The exact sum being loaned.
Repayment terms – Monthly or lump sum payments, and when repayment is due.
Interest (if any) – If charging interest, specify the rate.
Security (if any) – Whether the loan is secured against an asset (e.g., property).
Loan forgiveness terms – Whether the loan can be converted into a gift.
Signatures – Both parties should sign to confirm agreement.
💡 Example: If a parent lends £50,000 interest-free to their child for a house deposit, a written agreement clarifies that the amount must be repaid to avoid it being considered a gift for IHT purposes.
2. Secured vs. Unsecured Family Loans
Family loans can be either secured or unsecured, depending on the lender’s level of risk tolerance.
Loan Type | Definition | Pros | Cons |
Unsecured Loan | A loan without collateral | Easier and quicker | No legal protection if the borrower defaults |
Secured Loan | A loan secured against an asset, such as property | More legally binding; reduces risk of non-repayment | Requires legal formalities; may incur extra costs |
💡 Example: A mother lends her son £100,000 to buy a house, securing the loan against the property. If he fails to repay, she has the legal right to reclaim the money through the property sale.
3. Should You Charge Interest on a Family Loan?
While charging zero interest avoids income tax implications, some lenders choose to apply a small interest rate to formalise the loan and avoid HMRC scrutiny.
Pros of Charging Interest:
✅ Helps maintain financial discipline for the borrower.
✅ Reduces the risk of HMRC questioning whether it’s a gift.
✅ Earns a return for the lender.
Cons of Charging Interest:
❌ The lender must declare interest earnings on their tax return if they exceed the Personal Savings Allowance (£1,000 for basic rate taxpayers, £500 for higher rate taxpayers in 2024/25).
❌ May create tension between family members.
💡 Example: A father lends £30,000 to his daughter at a 2% interest rate, earning £600 per year. Since this is below the £1,000 Personal Savings Allowance, he doesn’t pay income tax on the interest.
4. Tax Considerations When a Loan is Repaid or Written Off
If the loan is repaid, there are no tax consequences.
If the loan is written off (forgiven), it may be considered a gift and subject to inheritance tax (IHT) rules if the lender dies within seven years.
💡 Example: A grandfather lends his grandson £20,000 interest-free. Five years later, he decides to forgive the loan. If he dies within two years, the £20,000 might be included in his estate for IHT purposes.
5. Common Mistakes to Avoid When Loaning to Family
❌ No Written Agreement
Not documenting the loan can lead to legal disputes or HMRC questioning whether it was actually a gift.
Solution: Always draft a loan agreement (even a simple one) to clarify repayment terms.
❌ Not Considering IHT Rules on Loan Forgiveness
Many people assume writing off a loan is tax-free, but it can trigger inheritance tax if the lender dies within seven years.
Solution: If you plan to forgive a loan, ensure it fits within your IHT strategy.
❌ Charging Too Much or Too Little Interest
Charging high interest can make the loan financially unsustainable for the borrower.
Charging no interest may cause HMRC to classify it as a gift instead of a loan.
Solution: If interest is charged, keep it reasonable and in line with market rates.
❌ Not Considering the Borrower’s Circumstances
If the borrower cannot repay, the loan may never be recovered, leading to financial loss for the lender.
Solution: Assess the borrower’s ability to repay before lending money.
6. How to Structure a Family Loan to Avoid Tax Complications
To legally and tax-efficiently loan money to family members, follow these steps:
Step | Action |
Step 1 | Decide whether to charge interest or not. |
Step 2 | Draft a written loan agreement to avoid tax disputes. |
Step 3 | If lending a large amount, consider securing the loan against an asset. |
Step 4 | If interest is charged, declare it on a Self-Assessment tax return if it exceeds the Personal Savings Allowance. |
Step 5 | If planning to forgive the loan, factor in inheritance tax (IHT) implications. |
Step 6 | Keep a record of repayments to prove it remains a loan and not a gift. |
Key Takeaways
Always document a family loan with a loan agreement to avoid disputes.
Decide whether to charge interest, keeping tax rules in mind.
A written-off loan can trigger IHT if the lender dies within seven years.
Secure large loans against an asset to protect the lender’s financial position.
Alternatives to Loaning Money to a Family Member Tax-Free in the UK
So far, we’ve covered the tax rules, best practices, and legal considerations for loaning money to family members in a tax-efficient way. However, in some cases, a loan may not be the best approach. Other financial support methods could be simpler, more tax-efficient, and legally secure.
In this section, we will explore:
When gifting money might be better than lending.
Using joint ownership or trusts as alternative financial support.
The tax differences between lending vs gifting money.
1. Should You Loan or Gift Money to a Family Member?
A loan is suitable when you expect repayment, but in some cases, a gift may be a better option—especially for inheritance tax planning.
Factor | Loaning Money | Gifting Money |
Expect repayment? | Yes | No |
Tax implications? | Potential income tax (on interest) or IHT (if forgiven within 7 years) | Potential IHT if above £3,000 annual exemption |
Legal documentation needed? | Recommended | Not required, but advisable |
Can it be recalled? | Yes, if legally documented | No |
When Gifting is Better than Lending
✅ If the amount is small and fits within the £3,000 annual gift exemption (2024/25).
✅ If the lender does not need the money back and wants to avoid disputes.
✅ If the gift is part of inheritance tax (IHT) planning to reduce the size of the estate.
💡 Example: A parent gifts £3,000 per year to their child. Since this fits within the annual exemption, it is immediately outside of their estate for IHT purposes.
When Lending is Better than Gifting
✅ If the lender may need the money back in the future.
✅ If the amount is significant (e.g., over £50,000), and the lender wants legal protection.
✅ If the loan is for a specific purpose, such as buying a house, and both parties want repayment terms in writing.
💡 Example: A parent lends their child £100,000 for a house deposit. If the child divorces later, a loan agreement protects the money from being considered part of marital assets.
2. Using Joint Ownership Instead of a Loan
In some cases, rather than loaning or gifting money, a family member can contribute financially through joint ownership.
Option 1: Buying Property as Tenants in Common
Instead of lending money, the lender could become a co-owner of the property under a tenants in common agreement. This way, the money is legally protected, and their share is clearly defined.
✅ Pros:
Protects the lender’s financial contribution.
Avoids inheritance tax issues related to loan forgiveness.
Provides a clear legal structure for ownership.
❌ Cons:
The co-owner will be liable for Capital Gains Tax (CGT) if they later sell their share of the property.
If one owner dies, their share does not automatically transfer to the other owner.
💡 Example: Instead of loaning £50,000, a father buys a 25% share in his child’s home. If the house appreciates in value, he benefits from the capital growth.
Option 2: Placing Money in a Trust
If the lender is concerned about tax implications but still wants to support a family member, setting up a trust could be a tax-efficient alternative.
✅ Pros:
Helps with inheritance tax planning.
Protects the money from being misused.
Can specify when and how the beneficiary receives the funds.
❌ Cons:
Setting up a trust requires legal advice and administrative costs.
Certain trusts may still be subject to inheritance tax and trust taxes.
💡 Example: A grandparent sets up a discretionary trust for their grandchildren, ensuring that money is distributed tax-efficiently over time rather than given as a lump sum.
3. Tax Differences: Loaning vs. Gifting Money to Family Members
Scenario | Tax Implications |
Loaning money (interest-free) | No immediate tax, but if later forgiven, it could be subject to IHT if the lender dies within 7 years. |
Loaning money with interest | Lender must pay income tax on the interest earned if it exceeds their Personal Savings Allowance. |
Gifting money | Up to £3,000 per year is tax-free under the IHT exemption. Larger gifts are potentially taxable if the giver dies within 7 years. |
Loan secured against property | No immediate tax, but the lender may be liable for CGT if the property is later sold. |
Placing money in a trust | Depending on the trust type, it may be subject to trust tax rules and periodic inheritance tax charges. |
✅ Best Practice for Tax Efficiency:
If under £3,000 per year, gifting is better (tax-free).
If above £3,000, consider documenting it as a loan to prevent IHT issues.
If gifting large amounts, consider trusts or joint ownership for better tax efficiency.
4. Alternative Ways to Financially Support Family Without Loans or Gifts
If neither loaning nor gifting is ideal, here are other options to support family members:
A. Offering a Personal Guarantee
Instead of lending money directly, you could act as a guarantor for a mortgage or loan.
✅ Pros:
No cash exchange needed.
No tax liability for the lender.
Helps the borrower qualify for a loan.
❌ Cons:
If the borrower defaults, the lender (guarantor) is legally responsible for repaying the debt.
💡 Example: A parent guarantees their child’s £200,000 mortgage, allowing them to buy a home without a deposit.
B. Contributing to a Family ISA or Pension
Rather than giving cash, another option is contributing towards tax-efficient savings.
✅ Pros:
Money grows tax-free.
Helps the recipient build long-term wealth.
❌ Cons:
Access is limited (e.g., pensions cannot be withdrawn until age 55).
💡 Example: Instead of gifting £10,000, a parent contributes to their child’s Lifetime ISA, where the government adds a 25% bonus on savings up to £4,000 per year.
Choosing the Right Approach for Your Situation
When deciding how to financially support a family member, ask yourself:
1️⃣ Do I expect the money to be repaid? → If yes, structure it as a loan with a written agreement.
2️⃣ Am I trying to reduce inheritance tax? → If yes, consider gifting within the £3,000 exemption or using a trust.
3️⃣ Do I need legal protection? → If yes, joint ownership or secured loans may be better.
4️⃣ Am I worried about tax implications? → If yes, choose the method that best fits within tax-free allowances (e.g., ISA contributions, tax-free gifts).
Each situation is unique, and it’s always wise to seek professional financial advice before making large financial commitments.
Summary of the Key Points of the Article:
Loaning money to a family member in the UK is tax-free, but potential tax implications arise if interest is charged or the loan is later forgiven.
Inheritance tax (IHT) may apply if a loan is written off as a gift and the lender dies within seven years.
Interest-free loans have no direct tax consequences, but if interest is charged, the lender must declare it on their tax return if it exceeds the Personal Savings Allowance.
A written loan agreement is essential to prevent disputes, clarify repayment terms, and ensure HMRC does not treat the loan as a gift.
Securing a loan against an asset, such as property, offers legal protection, but may involve additional tax and legal considerations.
Alternative financial support options include gifting money (subject to annual exemptions), joint property ownership, and trusts, each with different tax implications.
Loan forgiveness can trigger inheritance tax liabilities, making it crucial to plan loans as part of an overall estate strategy.
Loaning money from a business to a family member has tax consequences, including potential corporation tax charges and benefit-in-kind tax.
If a family loan is not repaid, legal action can be taken, but having formal documentation strengthens enforceability.
Before loaning money, it is advisable to seek professional tax or legal advice to ensure tax efficiency and legal protection.
FAQs
Q1. Can you give an interest-free loan to a family member without informing HMRC?
A. Yes, you can give an interest-free loan to a family member without informing HMRC, as there is no automatic requirement to report it. However, if the loan is later written off as a gift or if interest is charged, it may have tax implications and should be disclosed accordingly.
Q2. Does loaning money to a family member affect your credit score?
A. No, loaning money to a family member does not impact your credit score because private loans between individuals are not reported to credit agencies. However, if you borrow money yourself to fund the loan, it could affect your credit history.
Q3. Can a family loan be challenged in court if the borrower refuses to repay?
A. Yes, a family loan can be challenged in court, but only if there is clear documentary evidence, such as a written loan agreement, proof of transfer, and communication about repayment terms. Without formal documentation, it may be difficult to prove that the money was a loan and not a gift.
Q4. Can a family loan be secured against a property without a mortgage lender’s permission?
A. No, if the property has an existing mortgage, the primary lender’s consent is usually required before a loan can be secured against it. Adding a second charge without permission could violate mortgage terms and result in financial penalties.
Q5. Can you lend money to a family member from your business without tax consequences?
A. No, loaning money from a limited company to a family member can have tax consequences, such as benefit-in-kind tax, corporation tax implications, or triggering an overdrawn director’s loan account, which could be subject to an additional 32.5% tax charge under Section 455 of the Corporation Tax Act 2010.
Q6. Can a family loan be included in a will?
A. Yes, a family loan can be included in a will, either as an outstanding debt that must be repaid to the estate or as a forgiven amount, which may then be considered a gift subject to inheritance tax (IHT).
Q7. Can a family loan affect benefits such as Universal Credit or Pension Credit?
A. Yes, a family loan could affect means-tested benefits if it is perceived as income or capital. If a loan is interest-free and repayable, it is usually not counted as income, but if repayments are flexible or never enforced, it could be treated as a gift and affect benefit eligibility.
Q8. Can you loan money to a family member through a third-party escrow service?
A. Yes, using an escrow service can help secure the transaction and ensure that funds are only released according to agreed terms. This can add a layer of legal protection, but it does not eliminate tax liabilities if the loan is later forgiven or generates interest.
Q9. If you lend money to a family member, can they deduct the interest on their tax return?
A. No, individuals in the UK cannot usually deduct loan interest on personal loans from their taxable income unless the loan is used for specific business purposes, in which case interest relief rules may apply.
Q10. Can a family loan be transferred to another person?
A. Yes, a family loan can be transferred to another person through a novation agreement, where all parties agree that a new borrower assumes responsibility. However, legal documentation is necessary to ensure enforceability.
Q11. Can you take legal action if a family member defaults on a private loan?
A. Yes, if a family loan is documented, legal action can be taken through small claims court (for amounts up to £10,000 in England and Wales). If the loan was informal or not documented, it becomes much harder to enforce.
Q12. Do you need a solicitor to draft a family loan agreement?
A. No, a solicitor is not required, but it is highly recommended for large amounts. You can create a legally binding loan agreement yourself, but using a solicitor ensures that all tax and legal implications are properly addressed.
Q13. Can you write off a family loan to reduce inheritance tax while still alive?
A. Yes, you can write off a family loan while alive, but it then becomes a Potentially Exempt Transfer (PET) and may be subject to inheritance tax if you die within seven years.
Q14. Can a family loan be paid in instalments instead of a lump sum?
A. Yes, a family loan can be structured as instalment payments rather than a lump sum, and it is advisable to document the repayment schedule to avoid any tax misunderstandings.
Q15. Can loaning money to a family member affect your ability to get a mortgage?
A. Yes, if you lend a large sum, it could affect your debt-to-income ratio, reducing your mortgage eligibility. Some lenders may also require evidence that the loan will be repaid before approving a new mortgage.
Q16. Can you loan money to a family member while receiving care home funding?
A. No, if you are receiving local authority-funded care, loaning money could be seen as deliberate deprivation of assets, potentially affecting your eligibility for financial support.
Q17. Can a family loan be made in cryptocurrency?
A. Yes, but it is highly complex. If interest is charged in cryptocurrency, it may be subject to Capital Gains Tax (CGT) upon repayment, and fluctuations in value can create tax-reporting challenges.
Q18. Can loaning money to a family member result in Stamp Duty charges?
A. No, loaning money itself does not trigger Stamp Duty Land Tax (SDLT). However, if the loan is structured as an equity stake or co-ownership, SDLT might apply if thresholds are exceeded.
Q19. Can a family loan be refinanced with a commercial lender later?
A. Yes, a family loan can be refinanced by a bank or commercial lender, but the lender will require proof of the original loan agreement and repayment history to assess creditworthiness.
Q20. Can a family loan be considered taxable income for the borrower?
A. No, the loan itself is not taxable income for the borrower. However, if the borrower is charged interest and later has the loan forgiven, the interest portion may be considered taxable income under certain circumstances.
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