Myth one: “lending triggers tax”
It doesn’t. Handing your daughter £20,000 as a documented loan is not a taxable event for either of you — no income arises, nothing needs reporting, and repayments of the principal come back to you untaxed, because they were always your money. The UK also has no gift tax, so even choosing the gift route creates no immediate charge.
The one thing that genuinely is taxable
Interest. If you charge it, what you receive is savings income in your hands, sitting alongside bank interest on your tax picture. The Personal Savings Allowance (and, for lower incomes, the starting rate for savings) often absorbs modest amounts entirely — the numbers are below — but the classification is fixed, and larger interest streams belong on a self-assessment return. Choosing a rate in the first place? That decision has its own guide. The borrower, note, gets no relief for paying it; personal loan interest isn’t deductible.
Where inheritance tax enters — and where it doesn’t
A loan outstanding at your death is an asset of your estate, valued like any other: the estate can collect it or offset it against that child’s inheritance. A gift plays by different rules — potentially exempt, falling out of your estate if you survive seven years. Neither is a trap; they’re simply different plans. The genuine trap is ambiguity: an undocumented “loan” your executor can’t prove is a headache with your children’s names on it. One signed page resolves it in advance.
The numbers HMRC actually applies
For the lender charging interest, three figures decide whether any tax is actually payable: the Personal Savings Allowance (£1,000 of savings income tax-free for basic-rate taxpayers, £500 at higher rate, nil at additional rate), the starting rate for savings (up to £5,000 of savings income at 0% where non-savings income is low enough — common for retired lenders), and your marginal band for anything above both. Run the arithmetic against your actual rate with the calculator; many family loans never generate enough interest to clear the allowances at all.
On the estate side, the useful numbers: gifts use the £3,000 annual exemption first; beyond it a gift is a potentially exempt transfer that falls out of your estate after seven years. A loan you later forgive becomes a gift at the moment of forgiveness — and a waiver given for nothing in return should be executed by deed to be effective, a detail executors are grateful for. None of this requires reporting a family loan to HMRC when it’s made: there is no form for lending, only for the interest income it produces.
Two tidy habits worth adopting
First, waive interest deliberately if you waive it — a 0% loan is clean; an intended 3% that’s never collected is clutter. Second, if you later forgive part of the loan (a wedding, a milestone), record the forgiveness in writing and date it: forgiveness is a gift, the seven-year clock applies to it, and the paper trail keeps both the family ledger and the estate file coherent.