There's no gift tax in the UK, and lending money itself isn't taxed — but any interest you receive is income HMRC expects you to declare. The other angle is inheritance tax: an outstanding loan stays in your estate, and the seven-year clock only starts if you formally write the loan off as a gift.
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.
Can you loan money to a family member tax-free in the UK?
Yes — and for most families the answer is that simple. There is no gift tax in the UK and no tax on the act of lending. Hand your daughter £20,000 and neither of you owes HMRC anything on the transfer. If you charge no interest, there is nothing to declare, nothing to report, and no form to file. An interest-free family loan is genuinely tax-free on both sides.
Interest is the only thing that changes it. Any interest you receive is savings income and must be reported through Self Assessment if it takes you past your Personal Savings Allowance. The borrower gets no relief for paying it, because a personal loan is not a deductible expense. So the tax question reduces to one decision: charge interest and accept a reporting obligation, or lend interest-free and have none.
The place where people go wrong is inheritance tax, and it runs the other way from what they expect. A loan is not a transfer of value, so it does not start the seven-year clock — the unpaid balance stays in your estate and can be taxed there. A gift does start the clock. Lending is the tax-free option today; gifting is the one that may cost less in the long run.
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.
Common questions
Can you loan money to a family member tax-free in the UK?
Yes. There is no gift tax in the UK and no tax on lending itself. An interest-free loan to a relative creates no tax liability and nothing to declare for either party. Only interest changes that — interest you receive is savings income and may need reporting through Self Assessment.
How much money can you lend a family member without tax?
There is no limit. The amount is irrelevant to tax on the loan itself, because lending is not a transfer of value. What matters is whether interest is charged and, for inheritance tax, whether the money is genuinely a loan or in substance a gift.
Does a family loan affect inheritance tax?
Yes, but not in the way most people assume. An outstanding loan remains an asset of your estate and can be taxed there. A gift leaves your estate and falls out of the inheritance tax net after seven years. Lending is the tax-free option now; gifting is the one that may reduce the eventual bill.
Do I need to tell HMRC about a loan to my child?
Not for the loan. If you charge interest and it takes you above your Personal Savings Allowance, you report that interest through Self Assessment. An interest-free loan requires no notification at all.
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.