What Are The Tax Implications Of Lending Money To Your Family In The UK?
By
HuutiMoney
Lending money to family in the UK can be a tricky business. Not only do you need to consider the practical and emotional implications, but you also need to be aware of the potential tax implications. This blog post will explore the legal, financial and tax implications of lending to family in the UK, so you can make an informed decision about what is right for you.
What Are The Tax Implications Of Lending Money To Your Family In The UK?
There are no tax implications for lending money to your family (or even friend) in the UK if you are not charging interest on the amount you loan to them. However, if you claim interest on loans to family members, you will have to declare the amount your receive in the form of interest income in a self-assessment tax return.
When lending money to family or friends in the UK, you should be aware that you will be taxed on any interest you earn. The amount of interest you can earn is determined by the HMRC and is subject to change annually. The current tax rate on lending to your family in the UK is 20%, although this may differ depending on your personal circumstances.
It is important to note that you will be taxed on all interest earned, regardless of whether you have received it or not. This means that if you lend money to your family, you must include any expected interest when calculating your tax liability. It is also important to consider that any interest earned may be subject to inheritance tax if the loan is given as part of an estate plan.
According to a 2020 survey published by the Financial Conduct Authority, more than 5 million borrowed money from their parents in 2020 and more than 9 million people expected to take a loan from the family in the near future.
Even though personal lending is a common practice, it is a good idea to keep detailed records of any loans given to family members. This will help ensure that any interest you earn is correctly declared to the HMRC and can help you avoid any potential fines or penalties.
Additionally, if the loan amount is large enough, it may be necessary to register with the HMRC in order to declare the interest earned. In cases where no interest is involved, a written agreement can prove to be helpful for the purpose of record-keeping.
Is There A Limit To How Much Money You Can Lend Your Family In The UK?
There is no limit to how much money you can lend your family in the UK under the following conditions:
- the lender does not charge interest on the loan
- the lender does not convert the loan into a gift
You can only gift up to £3,000 annually to a family member (this does not include a spouse or a partner) and £325,000 in the form of inheritance to avoid being taxed.
When it comes to lending money to your family, it’s important to be aware that the amount you can lend is limited. This is because the UK tax system does not allow for unlimited loans of this nature.
The maximum amount you can lend to family members in the UK is £15,000 if you intend to charge interest on the loan. Any amount over this limit will not be eligible for tax relief and could result in the lender having to pay taxes on the interest earned from the loan.
It’s essential to take note of these limits when lending to family members, as failing to do so could result in unwanted tax bills. It’s always best to consult with a qualified financial advisor before taking out any large loans.
Are There Any Risks To Lending Money To Your Family In The UK?
When lending to family members or friends in the UK, it is important to consider the potential risks. Firstly, if the borrower does not pay you back, then you may be out of pocket and have no legal recourse. Additionally, if you are in a dispute with the borrower, it could strain your relationship with them.
You should also consider the risk of becoming a “lender of last resort”. This is when you lend to someone who is already in debt and can’t get credit from anywhere else. If they cannot repay you, then you will be left without the money you lent.
Finally, depending on the size of the loan and whether or not it is secured, there could be legal costs associated with setting up the loan agreement. As such, it is important to get professional advice before making any decisions.
Conclusion:
A survey conducted by Shawbrook in February 2022 indicates that 77% of people in the UK would consider taking a loan from a family member in an emergency. This could mainly be due to the lack of any tax implications in the case of personal loans. However, when there is interest to be charged on a loan; the lender has to face certain tax implications for earning an interest income.
References:
Tax issues with family loans | Private Client Tax – BDO
My family has given me some money: might I need to pay tax on it?