Money you lend a family member doesn’t leave your estate: whatever is still owed when you die counts as part of your estate like any other asset, and forgiving the loan in your will doesn’t change that. Writing it off during your lifetime can work — by deed, as a gift that starts the seven-year clock — and your £3,000 annual exemption lets you release some of it tax-free each year.
Before you read: figures are for the 2026/27 tax year. This is general information for England & Wales, not tax or legal advice. Inheritance tax depends on your whole estate, so check your own position with a solicitor or tax adviser before acting on it.
Loan or gift? The difference at a glance
Parents often lend rather than give because a loan feels safer — the money can come back if it’s needed. For inheritance tax, the two work in opposite directions. A loan keeps the money in your estate. A gift starts it on its way out.
| Interest-free loan | Outright gift | |
|---|---|---|
| When the money moves | No tax, and the seven-year clock doesn’t start | No tax at the time; it’s a “potentially exempt transfer” |
| If you die within seven years | Whatever is still owed is in your estate | Counts against your £325,000 nil-rate band |
| If you die after seven years | Whatever is still owed is still in your estate | Falls out of your estate completely |
| Paperwork that matters | A signed loan agreement and a record of repayments | A note of the gift; a deed if you’re writing off a loan |
The current thresholds: the first £325,000 of an estate is tax-free (the nil-rate band), plus up to £175,000 more when your home passes to children or grandchildren (the residence nil-rate band). Both are frozen until 5 April 2031. Above them, inheritance tax is charged at 40%. Anything you leave to a spouse or civil partner is exempt.
How HMRC sees a family loan
Making an interest-free loan that you can call in at any time isn’t a gift for inheritance tax. HMRC’s own manual says so: the grant of an interest-free loan repayable on demand “is not a transfer of value”, because the right to be repaid is worth exactly what you handed over. Cash leaves your account, an equal debt takes its place, and your estate is no smaller.
That’s why lending is tax-neutral on the day — and also why it doesn’t save any inheritance tax. Nothing has been given away, so the seven-year clock has nothing to run on.
One detail for larger loans: this is cleanest when the loan is repayable on demand. A long fixed-term loan with no interest can be worth less than its face value, and HMRC can value it that way. For most family sums it makes little difference, but if the amount is large, ask an adviser how the terms affect it.
What happens to the loan when you die
Whatever is still owed to you at your death is an asset of your estate, just like savings or a house. The law values it on the assumption that it will be repaid in full, including any interest due. Your executors have a legal duty to collect it — or to account for it if the borrower is also inheriting.
A lower value is allowed only where repayment is genuinely impossible or not reasonably practicable, and your executors must explain why, with evidence. A loan you simply never chased up is unlikely to qualify.
An example. You lend your son £40,000 and £30,000 is still owed when you die. That £30,000 is part of your estate. If your estate is already above your tax-free thresholds, it adds £12,000 of inheritance tax at 40%.
When a full inheritance tax account is needed, executors list each debt owed to the estate on form IHT416, “Debts due to the estate”, alongside the IHT400. The form asks when the loan was made, how much has been repaid and what written evidence exists — which is where a signed agreement and clean bank records save everyone time.
This matters more from April 2027. For deaths on or after 6 April 2027, most unused pension funds will count towards the estate for inheritance tax. More estates will be over the thresholds as a result, so an unpaid family loan is more likely to be taxed at 40% than it used to be.
Writing the loan off in your will
Many parents plan to forgive the balance in their will. It’s a kind thing to do, but it doesn’t reduce inheritance tax. Your estate is valued immediately before your death, and at that moment the debt still exists. The forgiveness takes effect as a legacy of that debt to your child — so it’s taxed with the rest of your estate.
Who bears the tax is a separate question. Unless your will says otherwise, inheritance tax on UK assets is normally paid out of the residue (what’s left after specific gifts) — so whoever inherits the residue — often your other children — effectively bears the tax on it. If that isn’t what you intend, make sure your will deals with it.
Some families use different wording instead: “any loan to my son is to be treated as part of his share”. The tax is the same either way. What changes is fairness between your children, which is often the real reason to decide this now rather than leave it to your executors.
Writing it off while you’re alive
Releasing a loan during your lifetime does move money out of your estate — but it has to be done properly. In England & Wales, a release given for nothing in return must be made by deed. HMRC’s manual is blunt: a release that isn’t made by deed is “void at law and in equity”, and letters or other evidence that you meant to let the debt go aren’t enough. Without a deed, the full balance is still in your estate.
A deed needs to say clearly that it is a deed, and you sign it in the physical presence of a witness who also signs. Video witnessing isn’t yet allowed for deeds.
The amount you release is a gift on the date of the deed. It uses up your £3,000 annual exemption for that tax year first (plus last year’s, if you didn’t use it). Anything above that is a potentially exempt transfer: if you live for seven more years, it drops out of account completely. If you die sooner, it’s added back and counted against your nil-rate band first. If that happens, your executors report the release on form IHT403.
Taper relief is often misunderstood. It reduces the tax on gifts made three to seven years before death — but only where your gifts in those seven years add up to more than the £325,000 nil-rate band. A gift inside the band pays no tax, so there’s nothing to taper; it simply uses up part of the band.
| Years between gift and death | Tax rate on the gift (if tax is due) |
|---|---|
| Less than 3 | 40% |
| 3 to 4 | 32% |
| 4 to 5 | 24% |
| 5 to 6 | 16% |
| 6 to 7 | 8% |
| 7 or more | 0% |
Taper in practice. Mum releases a £30,000 loan to her daughter by deed and dies four and a half years later. It was her only gift. The £30,000 (less her annual exemptions) sits inside her £325,000 nil-rate band, so no tax is due on the gift and taper relief has nothing to reduce. The effect is that less of her nil-rate band is left for the rest of her estate.
The £3,000-a-year approach
Some parents lend a lump sum and then forgive £3,000 of it each tax year. Each release is covered by the annual exemption, so it isn’t a potentially exempt transfer and there’s no seven-year wait for that slice. A release is a gift like any other, so the annual exemption can cover it.
It works, with limits worth knowing:
- Each release needs its own deed in England & Wales.
- The £3,000 is your total annual exemption for all your gifts that tax year, not £3,000 per person. It’s £6,000 only if last year’s went unused.
- You can’t also use the £250 small-gifts exemption on the same person in the same year.
- Whatever you haven’t released stays in your estate until it’s repaid or forgiven.
- It’s slow. A £30,000 loan takes around a decade to clear this way.
We couldn’t find any HMRC guidance on whether a pre-planned series of releases could be challenged, and forgiving a capital debt is unlikely to count as “normal expenditure out of income”. For anything beyond the simple version, take advice.
Lending towards a house deposit
The residence nil-rate band only applies to a home you lived in that passes to your children or grandchildren. A loan you made to help your child buy their home is a debt owed to you, not an interest in your own home — so it doesn’t attract the residence nil-rate band, even if it’s secured on their house. It does count towards the estate value used for the £2 million taper, above which the residence band shrinks.
If you live in a home that someone else bought with money you lent them, HMRC accepts that the pre-owned assets charge doesn’t apply while it remains a loan, because the debt stays in your estate. Forgiving that loan while you still live there is a different matter — take advice before you do.
Mortgage lenders also have views on borrowed deposits, and many prefer a gift. Our Bank of Mum and Dad guide covers how lenders treat a gift versus a loan.
If the borrower dies first — or you borrowed from a parent
The rules look different from the other side. When someone dies owing money to a relative, their estate can usually deduct the debt — but only if it was a genuine loan that could be enforced, made for real value, and it’s actually repaid to the lender out of the estate. That repayment condition has applied since 2013. A debt left unpaid is normally ignored unless there’s a real commercial reason for leaving it.
HMRC also looks for evidence of the loan at the time it was made; a lender’s say-so isn’t enough. And if the money lent to the deceased originally came from them — a parent gives a child £50,000 and later “borrows” it back — the debt isn’t deductible. Executors report these debts on form IHT419.
One knock-on effect: if your child dies owing you money and you then forgive the debt instead of being repaid, their estate may lose the deduction. That’s worth a conversation with the executors before anyone waives anything.
The records your executors will need
Most of the cost and stress in estates with family loans comes from missing paperwork. Keep these together:
- The signed loan agreement: amount, date, repayment terms and any interest.
- Bank records of the money going out and every repayment in.
- Every deed of release, dated and witnessed, with a note of which annual exemption each one used.
- A simple record of other gifts: what, to whom, how much and when.
- What your will says about the loan — forgive it, treat it as part of a share, or collect it.
Executors should keep inheritance tax records too: HMRC can ask to see them for up to 20 years after the tax is paid.
In Scotland? The rules differ — a loan can be released without a deed, and a debt generally can’t be enforced once it has prescribed (usually after five years). LendRight’s agreements cover England & Wales only.
Common questions
Does money I’ve lent my children count towards my inheritance tax?
Yes. Whatever is still owed to you when you die is part of your estate, valued as if it will be repaid in full, with any interest due. If a full inheritance tax account is needed, your executors list it on form IHT416, “Debts due to the estate”. A lower value is only allowed if repayment is genuinely impossible, backed by evidence.
If my will forgives the loan, does that avoid inheritance tax?
No. The debt still exists at the moment you die, which is when your estate is valued, so it’s taxed with everything else. Forgiving it in your will simply passes it to your child as a legacy. Unless the will says otherwise, the tax on it is normally paid out of the rest of the estate.
How do I write off a loan to my child properly?
In England & Wales, sign a deed of release in front of a witness. A letter, a text or a verbal “don’t worry about it” doesn’t legally cancel the debt, so it would still be in your estate. The amount you write off counts as a gift on the date of the deed.
Does the seven-year rule start when I lend or when I forgive?
When you forgive. Lending gives nothing away, so there’s nothing for the clock to run on. Releasing the loan is the gift. If you die within seven years, the amount released — after any annual exemption — counts against your £325,000 nil-rate band.
Can I forgive £3,000 of the loan each year tax-free?
Yes, if you haven’t used your £3,000 annual exemption on other gifts that tax year — and you can add last year’s if it went unused. In England & Wales each release needs its own deed. It works, but slowly: a £30,000 loan takes around a decade to clear this way.
Will taper relief reduce the tax if I die four years after forgiving the loan?
Only if your gifts in the seven years before death add up to more than £325,000. Taper relief reduces the tax on a gift, not its value, so a gift that fits within your nil-rate band gets no benefit — it just uses up part of the band.
My mum borrowed from me before she died. Can her estate deduct the debt?
Only if it was a genuine loan that could be enforced, and it’s actually repaid to you out of her estate. It won’t be allowed if the money you lent her originally came from her. If a full account is needed, her executors report it on form IHT419 — so keep the loan agreement and bank records.
This article is general information about inheritance tax for England & Wales, not tax or legal advice, and LendRight is not a firm of solicitors or tax advisers. Figures are for 2026/27 and can change. Scotland and Northern Ireland have different rules. For a large estate, a secured loan or any planning beyond the basics, speak to a solicitor or tax adviser.