Lending money to family and friends is something most of us do. And parents are most likely to lend money to their children. What do you need to know to make sure you get your money back?
Lending money to friends or family can be risky if it all goes wrong. It’s very hard to say no to a friend or family member in need, but you have to think about — and talk about — how the money will be repaid, and by when. If you can afford to give the money away, then make it clear that it’s a gift, but if you expect it to be repaid, it’s much better to discuss it upfront rather than after the event.
What to do:
- Make sure that you can afford to lend the money in the first place. That doesn’t just mean weighing up whether or not you can spare the money now but whether you’ll be able to spare the money for the duration of the loan – and possibly beyond that.
- Is it right for you to lend the money now? It’s not just a question of affordability but what you’d have to miss out on by not having the money to hand.
- Can your family member afford the loan? Unless you’re happy to give them the money, rather than lend it, you need to know what they will be able to afford to pay back the loan under the terms you agree.
- Draw up a contract or get something in writing. I’m sure may sound like it’s overly formal but I’ve had far too many emails from people who’ve never received the money back and who’ve not taken court action or found it harder to prove in court that they were owed the money, because there’s been nothing in writing.
SAVVY TIP: Make sure that anything you draw up in writing is signed in front of a witness.
If it’s hard to get the money back
You can take someone to the small claims court if they’ve not paid back money they’ve borrowed, but it’s obviously not the easiest thing to do if it’s a family member. It’s much better to be clear about the terms before you lend the money (even if it’s just ‘pay it back when you can’ if that’s what you’re happy with) to avoid any confusion.
SAVVY TIP: There is no such thing as a ‘small claims court’ – it’s just a process for dealing with claims for relatively small amounts of money in a normal court. You may be able to do it all online, depending on how much is owed to you and how many people owe you money. You can read more about this on the Gov.uk website, on the page called Making a court claim for money.
Giving money away
Most families support each other financially, whether it’s small gifts, help towards university costs or money for a deposit for a house or money for parents to help supplement their pension or pay for care.
Giving away money is perfectly legal and may not result in a tax bill unless you die within seven years of making the gift. The rules are:
- If you’re giving away money: there’s no tax to pay if you’re giving something away to a family member or friend.
SAVVY TIP: The rules are slightly different if you give money to a child to put in a savings account. In this case, any interest above £100 a year would count as yours and be taxed as your income. But this only applies to children aged 18 or under.
- There may be inheritance tax to pay; this applies to money that’s given away if the person doing the donating lives for less than seven years afterwards.
SAVVY TIP: Inheritance tax is payable on the estate (which is the money and property you leave behind when you die minus any debts you owe) when you die, if you leave more than £325,000 or £650,000 if you’re a married couple or are in a civil partnership. You can give away up to £3,000 a year without having to worry about inheritance tax (there are other allowances as well, which are spelled out in my article called Giving away money while you’re alive – understanding the rules on inheritance tax.
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