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
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
What's All This About Tax
Private Lending Choices
What's All This About Tax?
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
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
All This About Tax
between Parents and Children / Other Private Lending Choices