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We provide expert legal advice on family loan agreements or loan agreements between friends, which are also sometimes described as private or personal loan agreements.
Discussions over borrowing money with those close to you can be difficult and somewhat awkward. However, lack of clarity often leads to disagreements and long term fall outs later, so it’s highly advisable to set things up clearly at the beginning. Affordable, experienced legal advice also often provides an objective input source to lower the awkwardness level.
Whether you're a parent lending money to a child, siblings borrowing from each other, or in-laws providing financial assistance, our experienced solicitors can help you navigate the complexities of these arrangements.
Clarity and documentation - it's essential to have a clear and well-documented agreement to avoid misunderstandings and disputes.
Interest and repayment – decide and clearly set out the terms such as whether the loan is interest free, or, if interest is payable, the way interest is calculated, whether interest is payable monthly, annually or calculated and paid at the repayment date and whether the loan should be repayable on demand based on certain situations or following a default of some kind.
Security - consider whether to require security for the loan, such as a property charge or personal guarantee.
Tax implications - be aware of the potential tax implications of family loans, especially if interest is charged.
Gift or loan? - decide whether the loan will be treated as a gift or a loan for tax purposes.
Property charge - if the borrower owns property, a charge can be created over the property to secure the loan. Be aware however that any charge may need the consent of a 1st ranking charge holder such as a mortgage lender and in reality, the security in real terms of a property 2nd charge will depend on remaining equity after a 1st charge is repaid.
Personal guarantee - can be obtained from the borrower or a third party to ensure repayment.
Unsecured? - a loan can be made without requiring any security.
Principal amount - the amount of money being loaned.
Interest rate - the rate at which interest will accrue on the loan.
Repayment schedule - the frequency and amount of payments.
Default provisions - the consequences of failing to repay the loan.
Governing law - the jurisdiction that will govern the agreement.
When parents lend or gift money to their children, it's important to consider the following legal issues:
Gift or Loan? - if the loan is treated as a gift, it will be treated as a Potentially Exempt Transfer (PET) under inheritance tax rules, meaning if the person gifting the money dies within 7 years, part or all the gift might be subject to inheritance tax.
Property Lender Issues - if a loan is considered better than to gift money for a deposit to purchase a property and the rest of the purchase price is coming from a mortgage lender, the lender may refuse to lend unless the advance from parents is a gift not a loan or the lender may impose significant conditions on the parental loan.
Waivers can be a potential risk factor in family loans because they can limit the lender's rights to recover the loan in the event of default. This is because in family or friend loan situations, it is common for the lender to agree not to strictly enforce the terms of the loan agreement.
The problem with this, in legal terms, is that it can constitute waiving of a breach by the borrower which then can result in the lender being unable to enforce further breaches. The way to avoid this is to ensure that any leeway or forbearance is expressly documented as agreed to not waive future breaches and to reserve and preserve the lenders rights in full
It is possible to have an English law family arrangement where a gift can convert into a loan under certain circumstances. This type of arrangement is often referred to as a "gift-over-security" or "revertible gift."
How it works:
Initial Gift - made from one family member (the donor) to another (the donee).
Conditions - the gift is made subject to certain conditions, such as it no longer being a gift if the recipient becomes involved in a relationship and/or allows someone to live in the property where money has been gifted towards it which the donor does not approve of.
Conversion to Loan -if one of the specified conditions occurs, the gift can revert back to the donor, becoming a loan. The donee may be required to repay the loan with interest.
Common scenarios where this type of arrangement might be used:
Parental gifts to children - parents may give property or assets to their children but want to retain a fallback option in case the child encounters financial difficulties.
Gifts between siblings - siblings may make gifts to each other with the understanding that the gift can be reclaimed under certain circumstances.
Important considerations:
Tax implications - the conversion of a gift into a loan can have tax implications for both the donor and the donee. It's essential to consult with a tax advisor to understand the potential consequences.
Documentation - a clear and well-drafted agreement is crucial to establish the terms of the gift-over-security arrangement and to protect the interests of both parties.
Legal advice - it's highly recommended to seek legal advice from a solicitor specializing in family law to ensure that the arrangement complies with English law and is enforceable.
While this type of arrangement can be useful in certain circumstances, it's important to carefully consider the potential risks and benefits before entering into one.
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