Before lending to a relative, have five conversations: whether you could afford to lose the money, the exact terms, whether any of it is really a gift, the tax angles, and what happens if it goes wrong. Agree the answers out loud, then put them in a short signed agreement.
Conversation one: with yourself, about losing it
The oldest rule in family lending still leads: never lend what you cannot afford to see vanish. Not because relatives are dishonest — overwhelmingly they are not — but because life is undefeated. Redundancies, breakups and illnesses do not consult repayment schedules. If losing the sum would damage your retirement or your sleep, lend less, or gift a smaller amount instead, and say so warmly.
Conversation two: the word itself
In the same sitting, both of you should say the actual word — loan — and hear the other person say it back. An astonishing share of family money disputes trace to two people who each left that conversation with a different noun in their head. English courts, when these disputes surface, look first for evidence of what was intended; a sentence in writing outweighs a decade of assumptions.
What judges start from when nothing was said
Two English cases are reassuring for lenders — with one big exception. In Seldon v Davidson [1968] 1 WLR 1083, the Court of Appeal held that when money is shown to have been handed over and the recipient claims it was a gift, the burden of proving the gift falls on the recipient — the natural starting inference is a loan, repayable. And in Chapman v Jaume [2012] EWCA Civ 476, where one partner had paid for major works on the other’s house and there was some agreement to repay but no proof of the exact terms, the Court of Appeal held the money was a loan repayable within a reasonable time after demand. The law leans your way between friends, siblings and unmarried partners. Between a parent and child it leans the other way: the presumption of advancement treats the money as a gift unless the parent can show otherwise. Either way, “leaning” still means a courtroom argument about intentions. The written word in a short agreement is what makes the leaning irrelevant.
Conversation three: numbers with dates attached
An amount, a transfer date, and a repayment pattern made of calendar dates — monthly figures a payslip demonstrably survives, or one settlement date if that’s the plan. Include the awkward clause while everyone is fond of each other: what happens when a payment is missed (if it ever does, there’s a right order to responding). Modelling instalments first with the loan interest calculator takes thirty seconds. A short grace period suits most families; larger sums sometimes warrant the whole balance becoming callable. Deciding this in advance is a gift to your future selves.
Conversation four: the ten-second tax check
Lending itself triggers no UK tax. Charging interest makes what you receive taxable savings income in your hands. Allowances often cover it; if they don’t, you need to tell HMRC. Most family lenders simply charge nothing, which is entirely lawful — the full HMRC picture is shorter than you’d think. If the sum is large and estate planning is in play, note that an outstanding loan remains an asset of your estate, which is frequently exactly what you want for evenness between children.
Conversation five: the one you have with a document
Everything above condenses into a short signed agreement: parties, amount, dates, interest position, missed-payment rule, and the loan-not-gift declaration. Send the money by bank transfer with the agreement’s reference attached, set up the standing order, and let paperwork do what nagging otherwise would. The builder drafts the whole thing in about four minutes. The families who write it down are the ones who never mention it again.
Common questions
Should I lend money to a family member?
Only if you could cope with losing it. Relatives are rarely dishonest, but redundancy, break-ups and illness don’t consult repayment schedules. If losing the sum would hurt your retirement or your sleep, lend less or give a smaller gift instead. If you do lend, agree the terms out loud and put them in a short signed agreement.
Is money I give my child a gift or a loan?
In England & Wales the law presumes that money from a parent to a child is a gift (the presumption of advancement). If you mean it as a loan, you need evidence: ideally a signed agreement made at the time, plus a bank transfer referenced as a loan. Between friends or siblings it’s the reverse: the recipient has to prove a gift.
Do I pay tax on money I lend to family?
Not on the loan itself: lending triggers no UK tax, and repayments of the money you lent aren’t income. Only interest is taxable, as savings income, and your Personal Savings Allowance often covers it. If interest takes you over your allowances, you need to tell HMRC. Most family loans charge no interest at all.
Can I charge interest on a loan to a relative?
Yes. England & Wales has no statutory interest cap for private loans, but a court can reopen a credit relationship it finds unfair, so keep the rate modest and state it as an annual percentage. Most family loans are interest-free; if you do charge interest, it counts as taxable savings income for you.