Is there any end in sight to rising house prices? At current levels, it’s certainly difficult for people to buy their own home. No matter what age they are. Saving for a deposit is really challenging. Especially given the current cost of living concerns. Often, family members want to help. Loaning loved ones some money is one option. But you can easily fall foul of tax legislation. So, be clear about family loan tax considerations.
So, let’s say you want to help your daughter to buy a flat. You and a relative decide to pool resources and loan her some money. She’ll add it to her own savings. Realistically, it’s the only way she can get onto the property ladder.
Family loan tax considerations
By way of example, you’re a pensioner whilst the other family member owns a business. It’s a small, limited company. Each of you loans your daughter £50,000. What is the tax position?
Basically, there are two key points to consider. One option is to loan the money interest-free. Both of you make a payment from personal savings. It’s very simple. Plus, there are no tax consequences.
On the other hand, perhaps you need some income. You could charge interest on the money loaned. Take care. Doing so might trigger a tax charge on interest received.
Then again, it might not be a personal loan. Your relative could make the payment from their business. The crux of the matter? It centres on the interest charge. What if the business doesn’t levy interest? The official rate is currently 2%. It means the amount loaned could be treated under loan benefit taxable benefits. Then, your daughter could be subject to tax. You’d need to take into account her salary and savings.
Employed by the SME
For instance, what if your daughter is an employee of the SME? Here, the loan is treated as a company loan. Therefore, a taxable loan benefit is levied on the daughter. Also, the business has National Insurance (NIC) to pay.
Of course, your daughter could be a relative of the SME director. In this case, the beneficial loan is treated as if the director had received the loan personally. Consequently, the tax charge would be on him.
In summary, circumstances can make a big difference. There’s no one size fits all solution. That’s why it pays to seek professional advice about family loan tax considerations.