Lending money to family is one of the most generous things you can do — and one of the most reliable ways to destroy a relationship. In 2025, with average UK house prices sitting at roughly eight times median earnings, tighter mortgage affordability assessments, and the cost of living still squeezing household budgets, intergenerational lending is surging. Parents are helping adult children onto the property ladder. Siblings are bridging gaps between jobs. Grandparents are funding education costs. The money flows freely; the paperwork, almost never.
That is where the trouble starts. If you are lending or borrowing within the family this year, the legal and tax consequences are more significant — and less intuitive — than most people realise. Here is what you genuinely need to know.
Why Family Loans Are Booming in 2025
The drivers are straightforward. First-time buyers need larger deposits as lenders demand lower loan-to-value ratios post-pandemic. The Bank of Mum and Dad is now involved in roughly a quarter of all UK property purchases, making it one of the largest effective mortgage lenders in the country. Meanwhile, high-street personal loan rates remain elevated, and credit card borrowing costs are punitive. Turning to a parent or sibling feels painless — until it isn’t.
Gift or Loan? Get This Wrong and Everything Else Unravels
The single most important decision is whether the money is a gift or a loan — and that decision must be documented in writing before a penny changes hands. Here is why:
- Mortgage applications: Lenders will demand a signed “gifted deposit” letter if the money is a gift, confirming no repayment is expected. If it is actually a loan, failing to disclose it is mortgage fraud — a criminal offence.
- Inheritance tax: A genuine gift falls under the seven-year rule for potentially exempt transfers. If the giver dies within seven years, it may be pulled back into their estate for IHT purposes. A loan, by contrast, remains an asset in the lender’s estate at full outstanding value — potentially increasing their IHT liability.
- Capital gains tax: If the money helps buy a property that later appreciates, the tax treatment differs depending on whether the family lender holds an equitable interest or merely a debt.
Ambiguity here does not just create family arguments; it creates problems with HMRC, mortgage lenders, and the courts. Pin it down early.
The SDLT Surcharge Trap Most Families Walk Straight Into
If a parent goes beyond lending and actually becomes a co-buyer on the property — perhaps because the child cannot qualify for a mortgage alone — a brutal tax surprise awaits. Where either co-buyer already owns residential property anywhere in the world, the 3% Stamp Duty Land Tax higher rate applies to the entire purchase price. On a £300,000 property, that is an additional £9,000 payable at completion. The child may be a first-time buyer, but the parent’s existing home contaminates the transaction. Many families discover this only when their solicitor raises it days before exchange.
Joint and Several Liability: The Risk Nobody Explains Properly
If the parent co-signs the mortgage rather than simply lending money, both parties take on joint and several liability. This means the lender can pursue either borrower for 100% of the outstanding debt — not just their “share.” If the child stops paying, the parent’s home, savings, and pension income are all on the line. Equally damaging: that mortgage debt appears on both borrowers’ credit files and will be stress-tested in full against any future borrowing application. The parent wanting to remortgage their own property, or the child wanting to move in five years, may find their borrowing capacity severely restricted.
Put It in Writing — Properly
A family loan agreement does not need to be elaborate, but it does need to exist and it needs to be executed as a deed, not a simple contract. Why? Obligations in a deed carry a twelve-year limitation period for enforcement, versus six years for a standard contract. If repayment stretches over a decade — common for property deposits — a simple contract may become unenforceable before the loan is fully repaid.
Your agreement should cover, at minimum:
- The exact amount lent and the date of transfer.
- Whether interest is charged. Even a nominal rate (say, 2%) makes the arrangement clearly commercial and easier to defend if challenged by HMRC or in divorce proceedings.
- A repayment schedule — monthly, quarterly, or lump sum on a fixed date.
- What happens if payments are missed, including any grace period.
- What happens on the death of either party — does the debt survive, and is it enforceable against the borrower’s estate?
- Whether the lender has the right to call in the loan early in specified circumstances (redundancy, sale of the property, etc.).
For sums above £10,000, getting a solicitor to draft or at least review the deed is money extremely well spent — typically £300 to £600.
When Family Money Buys Property: Declarations of Trust
If the loan funds a property purchase and the lender wants security or an equitable stake, a Declaration of Trust (also called a Deed of Trust) is essential. This document specifies each party’s beneficial interest, what happens on sale, and whether unequal contributions are treated as loans or equity adjustments. Without one, the courts and HMRC will default to assuming equal beneficial shares regardless of who actually paid what — a disastrous outcome if a parent contributed 40% of the deposit and expects that reflected in the proceeds.
The Declaration of Trust should also address:
- Tenancy in common versus joint tenancy: For non-married co-owners, tenancy in common is almost always correct. It allows unequal shares, independent inheritance rights, and avoids the automatic survivorship rule of joint tenancy — which would pass the deceased’s share directly to the other co-owner, bypassing their will entirely.
- Right of first refusal and buy-out mechanisms: If one party wants out, can the other match the market valuation and buy them out before the property goes on the open market?
- TOLATA 1996: Under the Trusts of Land and Appointment of Trustees Act, either co-owner can apply to court to force a sale even if the other party objects. This is expensive, adversarial litigation that tears families apart. A well-drafted trust deed with a clear exit mechanism dramatically reduces this risk.
Tax Implications You Cannot Afford to Ignore
If the family lender charges interest, that interest is taxable income and must be declared on their Self Assessment return. If no interest is charged on a very large sum, HMRC could theoretically argue a benefit has been conferred — though enforcement on genuinely informal family loans remains rare.
On the borrower’s side, if the loan helped purchase a property that is not their main residence, principal private residence relief will not fully apply on disposal, and CGT will be due on any gain attributable to the period (or proportion) it was not their primary home. For buy-to-let or second-home purchases funded by family money, the CGT exposure can be substantial.
What to Do Right Now
If you are about to lend to or borrow from a relative, take these steps before any money moves:
- Decide — gift or loan. Write it down. Sign it. Do not leave it vague.
- Check the SDLT position if the money relates to a property purchase, especially if any party already owns property.
- Draft a loan deed with a solicitor for any amount over £5,000. For property-related sums, commission a Declaration of Trust at the same time.
- Choose tenancy in common if you are co-owning property with a family member you are not married to, and register this with the Land Registry.
- Discuss the uncomfortable scenarios — death, divorce, redundancy, falling out — before they happen, not after.
Family lending done well is genuinely transformative. It can put a first home within reach, bridge a career change, or fund an education that changes a life. But the families who navigate it successfully are invariably the ones who treated the arrangement with the seriousness of a commercial transaction — because that is exactly what it is, regardless of how much love sits behind it. Paperwork is not a sign of distrust; it is the mechanism that preserves trust when circumstances change. And circumstances always change.
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.
