Lending money to someone you love is one of the most emotionally loaded financial decisions you will ever make — and one of the least well-managed. According to recent research, around £6.3 billion is owed in informal loans between friends and family across the UK at any given time. Much of it is undocumented. A significant chunk will never be repaid. And a depressing proportion of it will damage or destroy relationships that mattered far more than the money ever did.
If you have lent or borrowed money informally, or you are thinking about it, you need a proper system. Not because you do not trust the other person, but precisely because you do — and you want to keep it that way.
The Real Cost of “We’ll Sort It Out Later”
Most informal loans begin with good intentions and a handshake. The amount, the repayment terms, and what happens if circumstances change are left deliberately vague because raising those questions feels awkward. But vagueness is not kindness. It is a ticking time bomb.
Without clear terms, the lender starts to silently resent the borrower’s spending habits. The borrower, meanwhile, convinces themselves repayment was never really expected. Neither party wants to raise it because now the conversation feels even more awkward than it would have at the start. This dynamic is so common that debt charities like StepChange regularly deal with the fallout — family estrangements, mental health crises, and legal disputes that cost multiples of the original sum.
Here is the uncomfortable truth: if you would not lend the money to a stranger on the same terms, you should not lend it to family on those terms either. Familiarity is not a substitute for structure.
Why a Written Agreement Is Non-Negotiable
A written loan agreement does not signal distrust. It signals respect — for the money, for the relationship, and for both parties’ peace of mind. At minimum, any agreement between friends or family should cover:
- The exact amount lent, including whether it is a gift, a loan, or — critically — an equity stake (this matters enormously for property deposits; see below).
- Repayment schedule: monthly amounts, lump sums, or a defined trigger event such as a property sale.
- Interest: if any is charged, state the rate. If not, explicitly state zero interest — do not leave it ambiguous.
- What happens if the borrower cannot pay: grace periods, revised terms, and the process for renegotiating.
- Default provisions: what constitutes a breach and what remedies are available.
Execute it as a deed, not a simple contract. A deed carries a twelve-year limitation period for enforcement, compared with six years for a standard contract. Given that family loans often stretch over long time horizons, this difference can be the difference between having legal recourse and having none.
Property Deposits: The Minefield Most People Walk Into Blind
The single most common large informal loan in the UK is help with a house deposit. The so-called “Bank of Mum and Dad” is effectively one of the country’s largest mortgage lenders by volume. But the legal and tax consequences of getting this wrong are severe.
Mortgage lenders will ask where the deposit came from. If it is a loan rather than a gift, many lenders will either refuse the mortgage or factor the repayment obligations into their affordability calculations, potentially reducing the amount you can borrow. Some families therefore declare the money as a gift when it is actually a loan. This is mortgage fraud. It is a criminal offence, and lenders are increasingly sophisticated at detecting it.
If the money genuinely is a gift, the lender will typically require the donor to sign a gifted deposit letter confirming they have no expectation of repayment and no interest in the property. But if the donor dies within seven years, the gift may be subject to inheritance tax under the potentially exempt transfer rules. Larger gifts could trigger an IHT liability the recipient was not expecting.
If, conversely, the parents want the money back and want security, a formal legal charge over the property or a properly drafted Declaration of Trust is essential. Without one, proving the nature and terms of the arrangement years later becomes extraordinarily difficult — and expensive.
Co-Ownership Traps When Family Members Buy Together
Sometimes the “loan” morphs into a co-purchase, with a parent or sibling going on the title deed. This introduces a cascade of complications that catch people out every single time:
- Joint and several liability: on a joint mortgage, the lender can pursue either borrower for one hundred per cent of the outstanding debt. Not half. All of it. If your co-buyer stops paying, the entire obligation falls on you.
- SDLT surcharge: if either co-buyer already owns property anywhere in the world, the three per cent Stamp Duty Land Tax higher rate applies to the entire purchase price — even if the other buyer is a genuine first-time buyer who would otherwise qualify for relief. This can add tens of thousands of pounds to the transaction cost.
- Future borrowing capacity: lenders stress-test each borrower against the full mortgage debt when assessing future applications. A parent who goes on the mortgage to help their child may find they cannot remortgage their own home or borrow for years afterwards.
- Capital gains tax: principal private residence relief only applies to the share of the property that is the owner’s main home. If a parent is on the title but lives elsewhere, their share may attract CGT on disposal.
- Forced sale under TOLATA 1996: either co-owner can apply to court to force a sale of the property, even if the other refuses. This is a genuine litigation risk that most families never contemplate until it is too late.
If co-ownership is unavoidable, hold the property as tenants in common rather than joint tenants. This allows unequal shares, avoids automatic survivorship (which could disinherit the wrong people), and gives each party independent control over what happens to their share on death. Pair this with a comprehensive Deed of Trust covering beneficial interest percentages, exit mechanisms, rights of first refusal, shared expenses, occupancy rules, and renovation consent thresholds.
Building a Practical System That Actually Works
Documentation is essential, but a system is more than paperwork. It is a set of habits and tools that keep the arrangement transparent and on track throughout its life. Here is what a robust system looks like in practice:
- Written agreement executed as a deed before any money changes hands. Use a solicitor — template documents from the internet are better than nothing, but they frequently miss jurisdiction-specific requirements.
- A dedicated bank account or payment reference for repayments so there is a clear, auditable trail. Cash repayments with no record are an invitation for future disputes.
- Scheduled check-ins. Agree in advance — quarterly, say — to review the balance, confirm both parties are comfortable, and adjust terms if circumstances have changed. This removes the stigma of “bringing it up” because it is already in the diary.
- A written record of any changes. If you agree to pause repayments or adjust the schedule, document it with both parties’ signatures. Verbal amendments are difficult to enforce and easy to misremember.
- Professional advice for anything over £5,000 — or any amount linked to property. The cost of a solicitor’s letter or a short consultation with a tax adviser is trivial compared with the cost of getting it wrong.
The Bottom Line
Helping the people you care about is admirable. Doing it without structure is reckless. The awkwardness of setting up a proper agreement lasts an afternoon. The fallout from not having one can last a lifetime. Treat every informal loan with the same rigour you would expect from a bank — clear terms, written records, and regular communication. Your relationships, and your finances, will be stronger for it.
Disclaimer: The information provided in this article is for informational purposes only and should not be considered financial or legal advice. Property and lending laws in the United Kingdom vary and may change over time. We always recommend consulting with a qualified solicitor and mortgage broker before entering into a property purchase or financial arrangement with another party.
