Lending money to someone you care about is one of the most financially dangerous acts of generosity you can perform. Get the interest rate wrong \u2014 or worse, charge nothing at all \u2014 and you risk turning a private kindness into a tax liability, an unenforceable debt, or the spark that destroys a relationship. Most people agonise over whether to lend at all, then give almost no thought to the rate. That is precisely backwards. The rate you charge determines whether HMRC treats your arrangement as a genuine loan or a gift, whether you have any legal recourse if things go wrong, and whether either party faces an unexpected tax bill. Here is how to get it right.<\/p>\n
Charging no interest feels generous. In practice, it creates a host of problems that can hurt both lender and borrower. The most immediate risk is that HMRC \u2014 or a court \u2014 may decide your “loan” was really a gift. If that happens, the consequences cascade quickly:<\/p>\n
Charging some<\/em> interest \u2014 even a modest amount \u2014 immediately strengthens the legal character of the arrangement. It signals genuine commercial intent and makes the loan vastly more defensible.<\/p>\n There is no single legally mandated rate for private loans in the UK, but there are clear reference points you should use to anchor your decision.<\/p>\n The Bank of England base rate<\/strong><\/p>\n As of mid-2025, the Bank Rate sits at 4.5%. This is the floor beneath all UK lending. Charging at or slightly above the base rate demonstrates that your loan has a commercial character without being onerous. A rate of base rate plus 1\u20132% (so roughly 5.5\u20136.5%) is a sensible starting point for most family loans and sits well below what the borrower would pay on a personal loan from a high-street bank.<\/p>\n The HMRC “official rate” of interest<\/strong><\/p>\n HMRC publishes an official rate of interest, currently 3.75%, primarily used to calculate the taxable benefit on employer loans and director’s loans from close companies. While this rate technically applies to employment-related lending, it serves as a useful benchmark. If you charge at least the official rate, HMRC has little basis to argue the loan lacks commercial substance. If you charge below it, you should be prepared to explain why.<\/p>\n The commercial ceiling<\/strong><\/p>\n Never charge more than the borrower would pay on the open market. A typical unsecured personal loan from a bank currently runs between 6% and 12% APR depending on creditworthiness. Charging above that range risks the loan being deemed unconscionable \u2014 and, more practically, risks poisoning the relationship you were trying to help.<\/p>\n A practical framework:<\/strong><\/p>\n Interest you receive is taxable income. You must declare it on your Self Assessment return, and it will be taxed at your marginal rate. There is no exemption for family loans. Many lenders conveniently forget this, then face penalties when HMRC catches up.<\/p>\n On the borrower’s side, interest paid is only<\/em> tax-deductible if the funds are used for a qualifying purpose \u2014 typically acquiring income-producing assets. Interest on a loan used to buy a family car or fund a holiday is not deductible under any circumstances.<\/p>\n The IHT dimension deserves particular attention. If you lend a large sum interest-free and die before it is repaid, the outstanding balance forms part of your estate. But the interest you didn’t<\/em> charge may also be scrutinised. HMRC can argue that the ongoing benefit of an interest-free loan constitutes a series of gifts \u2014 one for each year the loan remains outstanding. This is a trap that catches families who think they are being careful by calling the arrangement a “loan” while structuring it like a gift.<\/p>\n A verbal agreement to lend money is technically enforceable in England and Wales, but proving its terms in court is a nightmare. You need a written loan agreement, and ideally it should be executed as a deed. Here is why that distinction matters: a simple contract has a six-year limitation period under the Limitation Act 1980, whereas obligations executed as a deed carry a twelve-year limitation period. For a family loan that might not be repaid for a decade, this difference is critical.<\/p>\n Your agreement should cover, at minimum:<\/p>\n If the borrower is using the money towards a property purchase with a partner, consider whether a Declaration of Trust is also needed to protect everyone’s interests \u2014 particularly if the loan forms part of the deposit. Without one, the borrower’s partner may later claim that money as a shared asset.<\/p>\n This is the conversation nobody wants to have upfront, which is precisely when you must have it. If the borrower cannot repay, a properly documented, interest-bearing loan gives you the ability to claim a capital loss \u2014 but only if you can demonstrate the debt has become genuinely irrecoverable. HMRC will look at whether you took reasonable steps to recover it, whether there was genuine commercial intent from the outset, and whether the loan was on arm’s-length terms. A zero-interest, undocumented arrangement fails every one of those tests.<\/p>\n Charge interest. Even a nominal rate of 1% transforms your legal position. For most family loans, a rate between the HMRC official rate (3.75%) and the Bank Rate plus 2% provides a defensible, fair middle ground. Put the agreement in writing, execute it as a deed, declare the interest income on your tax return, and revisit the arrangement if your circumstances or tax law changes. Lending to family is an act of trust \u2014 but trust without structure is just hope, and hope is not a financial plan.<\/p>\n Disclaimer:<\/strong> 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.<\/em><\/p>\n","protected":false},"excerpt":{"rendered":" **Discover how to set the right interest rate when lending money to friends or family in the UK, avoiding tax pitfalls with HMRC, protecting your relationship, and ensuring your loan is legally enforceable.**<\/p>\n","protected":false},"author":3,"featured_media":2208,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[47,18],"tags":[23,69,48,24,14,27,16],"class_list":["post-891","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-financial-guides","category-lending-money-tips","tag-borrowing","tag-guides","tag-interest","tag-lending","tag-loans","tag-money-tips","tag-tips"],"_links":{"self":[{"href":"https:\/\/chipkie.com\/uk\/wp-json\/wp\/v2\/posts\/891","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/chipkie.com\/uk\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/chipkie.com\/uk\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/chipkie.com\/uk\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/chipkie.com\/uk\/wp-json\/wp\/v2\/comments?post=891"}],"version-history":[{"count":8,"href":"https:\/\/chipkie.com\/uk\/wp-json\/wp\/v2\/posts\/891\/revisions"}],"predecessor-version":[{"id":3361,"href":"https:\/\/chipkie.com\/uk\/wp-json\/wp\/v2\/posts\/891\/revisions\/3361"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/chipkie.com\/uk\/wp-json\/wp\/v2\/media\/2208"}],"wp:attachment":[{"href":"https:\/\/chipkie.com\/uk\/wp-json\/wp\/v2\/media?parent=891"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/chipkie.com\/uk\/wp-json\/wp\/v2\/categories?post=891"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/chipkie.com\/uk\/wp-json\/wp\/v2\/tags?post=891"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}What Rate Should You Actually Charge?<\/h3>\n
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Tax Consequences You Cannot Afford to Ignore<\/h3>\n
Document Everything \u2014 And Use a Deed<\/h3>\n
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When the Borrower Defaults<\/h3>\n
The Bottom Line<\/h3>\n