Lending money to family is one of the most common financial transactions in Britain — the Bank of Mum and Dad advanced £9.6 billion in gifts and loans in a single recent year, helping over half of all first-time buyers — and one of the least documented. The good news: a family loan itself triggers no tax. The bad news: everything around it can — interest, inheritance tax, the mortgage lender's rules, even care-fee assessments — and the undocumented loan is a dispute generator with a decades-long fuse. Here is how to lend to family properly.
The tax on the loan itself: none — with two edges
Making a loan is not a gift, not income, not a disposal: no tax arises for either side when money moves. You are free to charge no interest — and unlike employer loans, there is no deemed-interest rule for private individuals; HMRC does not tax you on interest you chose not to charge.
The edges: if you do charge interest, it is taxable savings income in your hands — within the personal savings allowance (£1,000 for basic-rate taxpayers, £500 higher, nil additional) it costs nothing, beyond it it goes on your return, and from April 2027 savings income rates rise two points to 22%, 42% and 47%, making charged interest slightly more expensive to receive. And a loan that never gets repaid or serviced, with no documentation, invites HMRC — or a divorce court, or a sibling — to argue it was really a gift all along. The label you use matters less than the paper trail you keep.
Inheritance tax: where family loans genuinely bite
Three IHT rules do most of the damage in practice:
- The loan stays in your estate. An outstanding loan is an asset — a debt owed to you — valued and reported on your death like any other. Lending £200,000 to a child instead of giving it saves nothing for IHT: the seven-year clock never starts, because nothing has left your estate. Families who "lent" money years ago and mentally wrote it off are often carrying six-figure estate assets nobody remembered;
- Waiving a loan is a gift — but only by deed. Deciding to forgive the loan starts the seven-year PET clock, but in England and Wales an informal waiver ("don't worry about paying it back") is legally ineffective: the debt survives, and so does the estate asset. A waiver must be executed as a deed. This single formality failure is among the most common — and most fixable — errors we find in estate reviews. A pattern of deed-executed annual waivers within the £3,000 exemption is a legitimate slow-motion conversion of loan to gift;
- Debt games don't work. Anti-avoidance rules from 2013 restrict estates deducting liabilities that are never actually repaid or that exist for tax reasons — the loan-and-gift-back schemes of an earlier era are closed.
The planning consequence is simple: decide honestly whether this is a loan or a gift, document accordingly, and revisit it. A genuine loan protects the lender and keeps value in the estate; a genuine gift starts the IHT clock. The worst of both worlds is the ambiguous advance that ends up litigated in probate — our IHT rules guide covers where gifts fit the wider picture.
Helping with a house: the lender's rules trump yours
Most family loans fund deposits, and here a third party has a vote: the mortgage lender. Any family money toward a purchase must be declared, and most lenders insist deposit help is a gift, confirmed in a signed letter waiving repayment and any interest in the property — because a repayable family loan is a competing liability. Where the family genuinely wants a loan, some lenders will underwrite it as one (affecting affordability), and protection for the lending parent is possible: a second legal charge over the property (with the first lender's consent) or a declaration of trust recording the family's interest.
The protection is not paranoia. It is what stands between the parents' £100,000 and their child's future divorce, insolvency or death — the three events no one prices in at the kitchen table. A charge or trust deed costs a few hundred pounds; its absence has cost families the entire advance.
The other assessments that notice family lending
Two more regimes look at these transactions. Councils assessing care-home fees can treat gifts and loan waivers as deliberate deprivation of assets — with no time limit — if avoiding fees was a purpose; documentation showing the family's actual reasoning is the defence. And in means-tested and divorce contexts alike, the recurring question is the same one HMRC asks: was this really a loan? The answer that holds up is the one written down at the time.
The one-page loan agreement that prevents most of this
Every family loan above trivial size deserves a short written agreement: amount, date, interest (or explicitly none), repayment terms, what happens on death of either party — plus a record of repayments actually made. Add a deed for any waiver, a charge or trust deed where property is involved, and a line in your will dealing with outstanding family loans (forgiven at death? deducted from that child's share?). An hour of drafting converts a future family argument into an administrative footnote.
Acumon advises on the tax side of family lending — the IHT treatment, waiver planning, and how loans sit within the wider estate plan — through our inheritance tax planning and private client tax teams. If your family's balance sheet includes advances nobody has looked at in years, an estate review that inventories them is the cheapest tidy-up you will ever commission.