Private Loans: Borrowing & Lending Between Family & Friends
It's always been common to lend small amounts of money
to friends and family members on an informal
basis.
Few people ever bother with a written legal agreement, and
even fewer ask for interest to be paid on the loan.
That's still a popular approach for smaller amounts - but
increasing numbers of people are starting to take larger
loans from friends and family members - especially
parents and grandparents.
The two biggest reasons for this are high house
prices and student debts and tuition fees
- many families are offering loans to help their offspring
get a foot on the housing ladder and clear their student
debts a bit quicker.
The size of these loans can mean that questions of tax
come into play - particularly inheritance tax.
Very few people charge interest on loans to family members,
but those that do will also need to remember that such interest
qualifies as income - and is subject to normal income tax
rules.
Whoa!
What's All This About Tax
What
About Interest?
Other
Private Lending Choices
What's All This About Tax?
Good question.
The problem is that a loan still counts as an asset - you
own the debt and expect to get the money returned to you.
That means that a loan will still be included in the value
of your estate for inheritance tax purposes, should you
die.
It is possible to avoid this, but it does require some
forward planning - here's how:
- If the loan is to be made a gift, confirm this in writing
so that it's beyond doubt
- Once this has happened the loan becomes what's known
as a PET - Potentially Exempt Transfer
- The problem is, if the person who made the gift dies
within 7 years of making it a PET, it will still
be included in their estate for inheritance tax purposes.
After 7 years, it won't count for inheritance tax.
There isn't anything you can do to speed up this process
- the 7-year rule is a deliberate attempt to try and reduce
inheritance tax evasion. This is a growing problem as rising
house prices have pushed many people into the inheritance
tax bracket who previously would have been well below it.
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
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