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Borrowing & Lending Between Family & Friends



What About Interest?

Although it's uncommon for interest to be charged on loans to family members, it is sometimes is the case with friends and colleagues.

The problem is that any interest you receive on top of your loan repayments will count as income - just as savings interest does. This means it will have to be declared for income tax purposes and may require you to complete a self-assessment tax form.

Just to make things a little more complicated, however, interest payments may be eligible for tax relief - depending on the purpose of the loan.

If you think this may apply to you, the best way to find out your exact situation is to contact HM Revenue & Customs directly - here are their contact details.


What About Loans To My Parents?

If a child has made a loan to their parents that is still outstanding when the parent(s) die, this loan can be used to reduce the parents' inheritance tax liability.

This is done by offsetting the value of the loan against the value of their estate.

Here is an example:

          Value of outstanding loan: £50,000
          Value of estate: £250,000

          Value of estate for inheritance tax assessment = 250,000 minus 50,000 = £200,000

In this example, the value of the estate is below the inheritance tax threshold anyway, but in some cases the ability to offset debts owed against the value of an estate can be helpful in reducing inheritance tax liability.

Note: This rule does not give you an entitlement to claim the loan back from their estate. Such a claim would have to be processed using the normal procedures for outstanding debts and might require legally-binding proof of the loan and its status.

 

Read on Loans between Families / Parents and Children

What's All This About Tax

What About Interest?

Loans between Parents and Children / Other Private Lending Choices

UK Personal Finance Guides © 1999-2013 Moneysorter Ltd. All rights reserved. | Author: By Ed Parry