If you have the means, lending to friends and family can be a convenient way to help out loved ones.In particular, it’s very common to help them with a big financial expense, such as a wedding or buying a house.
In order toavoid creating family conflict and confusion, it’s important that the loan is done correctly and clear boundaries are set out straight away– nothing causes tension in familiesmorethan financial disagreements!Although you may not thinkit’s needed,family loan agreementsare incredibly useful as it allows all parties to be completely clear on what to expect.
Initial thoughts on family loans and financial gifts
Broaching the subject of gifting or loaning money to family is a bit of a difficult topic to begin with. In fact,in a recent survey we carried out on family and finances, we discovered that 56% of over 3000 people surveyed are embarrassed to ask their family for help.However, with the older generations (over 75),a huge 58%actuallysaid that theyenjoy helping out their familieswith money,so there’s no reason to be embarrassed and there’s no need for it to become a taboo topic!
Rules on gifting money to family
When it comes to therules on gifting money to family, the first thing you need to consider is can you really afford to lend the money? Think about whether lending the moneymeans you’ll have enoughfor potentialexpenditures in the future. If it’s currently in savings you’ll also need to bear in mind thatthis can affect the interest you make.Before making this big decision, we always recommend speaking to a financial advisorto help you consider all possible ramifications.
Additionally,if you’re lending the money as a loan,can your family member actually afford to pay you back? Also consider whether they’regoing to be ableto makeregularpayments over a period of time too.
Setting afamily loan agreement
Many people thinkfamily loan agreementsaren’t necessarydue to the personal relationship, but that’s actually precisely the reason why you should have onein place.A signed loan agreement can help reduce the tension that comes with lending money and will lay outthe terms anda clear payment plan, helping to avoid the awkwardness of having to ask for the money backor resolve disputes later down the line
What to include in thefamily loanagreement
Thefamily loan agreementshould include details such as a time frame for when the sum is expected to be paid back by, any interest (if applicable) and any consequences for missed payments – you may choose to set a fixed penalty or an interest chargefor example.Consider things like collateral–if your friend or family member has anything of worth, this can be a good way to ensure your money will be returned to you.
Think about interest
If your money was in savings prior to the loan, it may be a good idea to charge at least as much interest as it’d earn in savings to make sure that you don’t lose out. This will also ensure that the loan is seen as a loan and not a gift.
Keep records
Be sure to sign thefamily loan agreementand keep a copy for yourself and once you pay the money, make sure it’s traceable to avoid any disputes – never pay in cash.After the repayments start, ensureyoukeep record of all payments.
Tax implications on family loans
It’s a common belief that because family loans are a personal arrangement, there won’t be any tax implications involved. However, if there’s interest involved,you’ll need to inform HMRCand fill out a self-assessmentas it may be liable as taxable income.For loans without interest, you won’t need to tell HMRC.Speak to a financial adviser for advice on this and any implications for both parties.
If the money is gifted instead of loaned, the sum will be free from inheritance tax up to £325,000, but this will only apply if the loaner is alive up to seven years after initial payment.Up to £3000 a year canbegifted without paying taxat all and up to £5000 can be given as a wedding gift.For more information aboutinheritance tax on gifting, read our guide.
What to do if your family member isn’t paying you back
When lending to family, there’s always the risk that they won’t pay you back. If this happens, the first step you should take isto talk to them and find out what the situation is. It may bedue to personal circ*mstancesthat have changed or reasons outside of their immediate control.
Once you’ve spoken to them, there are a number of steps you can take. If it’s due to lack of funds, you can simply adjust the payment schedule or lengthen the loan period. On the other hand, if your friend or family member is being difficult and there’s afamily loan agreementin place, you can seek legal action.For sums below £5000, you may wish to take the issue to small claims court and for larger amounts it’s always best to seek legal advice to find out how best to proceed.
Now you know the basicrules on gifting money to familyandwhy it’s best to set upfamily loan agreements.If you’re not sure where to start withtheconversation ongiving or receiving a financial gift, read our article for our top tips and advice, next.
