Most people who lend to family or friends don`t charge interest. However, you should ask yourself if you will lose any significant income from the money during the period. It might be a good idea to charge at least the same interest you would earn on the money if it remained in your possession. Charging interest will also discourage the borrower from viewing the loan as a gift. If a sum of money is donated rather than loaned, it is exempt from inheritance tax up to £325,000. This only applies if the donor lives seven years after payment. The net present value that leaves the trust has an impact on the IHT and may give rise to immediate liability for IHT depending on the IHT regulations applicable to the trust. The value of a loan does not leave the trust because the debt remains an asset of the trust. However, to avoid the impression that the value has left the trust, trustees should make the loan repayable on demand and properly document the decision to grant the loan through a loan agreement with the beneficiary so that it is clear that the amount they received is a loan and not a direct capital advance. An example of a specific agreement for loan to friends or family can be found in our library. It balances the need to be formal enough for the borrower to know that the loan is not a charity with plain language so that the agreement does not appear “exaggerated” in the situation where the lender and borrower know each other well. It is commonly accepted that since family loans are a personal agreement, there will be no tax implications.
However, if there is interest, you will need to notify HMRC and complete a self-assessment, as it may be subject to tax as taxable income. For interest-free loans, you do not need to inform HMRC. Talk to a financial advisor for advice on this and any implications for both parties. When it comes to the rules for giving money to the family, the first thing you need to consider is whether you can really afford to lend the money? Ask yourself if lending the money means you have enough for potential expenses in the future. If these are currently savings, you should also keep in mind that this can affect the interest you earn. Before making this big decision, we always recommend that you speak to a financial advisor to help you consider all the possible implications. When you lend to the family, there is always a risk that they will not repay you. When this happens, the first step is to talk to them and find out what the situation is. This may be due to personal circumstances that have changed or to reasons beyond their immediate control.
First, ask yourself if you can afford the loan and if your situation were to change unexpectedly, you would have enough cash? What would you look like if the borrower can`t or won`t repay the loan or is actually looking for a gift and hopes not to have to pay the money back? In the interest of maintaining a good family relationship, it`s best to discuss repayment terms in advance – you might then decide that it`s best to give a gift, although perhaps to a lesser extent. Setting an interest rate on money lent to a parent can conflict with family values and relationships, as the transaction resembles a business transaction, just like in the case of a parent-child loan agreement. But sometimes there is no other option than to borrow from a family member. While the “mom and dad bank” seems to have become the most popular source of deposit loans for young people who want to climb the real estate ladder. Many people think that family loan agreements are not necessary because of the personal relationship, but that`s actually exactly why you should have one. A signed loan agreement can help reduce the tension that comes with lending money and sets out the terms and a clear payment plan to avoid the hassle of getting the money back or resolving disputes later at all levels. To reimburse them? Also determine if they will also be able to make regular payments over a period of time. Would you like to include a guarantee in the loan? It could be a car, a house, jewelry, etc. A lot of research on this topic suggests that many of those considering informal loans do not have access to high-quality businesses or business in the formal loan sector, so it might be useful to take a deeper look at the market.
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