Making a loan from a personal company to a family member

There are many possible situations in which a person may make a loan to a family member, for example, a parent may lend money to an adult child to provide them with a deposit for a property. Where the parent has a personal company, however, the situation becomes more complex. The company cannot simply hand over cash without proper consideration of the tax implications. In this guide, we’ll explore the key considerations when your company lends money to a family member, and how to structure things correctly with HMRC.

Is it a loan or a gift?

The first question to ask is whether this is genuinely a loan or a gift. This distinction matters enormously to HMRC. If you intend money to be repaid, it should be documented as a loan. If it’s a gift, it’s treated differently for tax purposes.

A genuine loan must have clear terms: the amount borrowed, the interest rate (if any), and the repayment schedule. Without this documentation, HMRC may challenge whether a loan actually existed. You don’t need a formal solicitor-drafted agreement, but a simple written record is essential. This protects both you and the family member, and demonstrates to HMRC that you treated the transaction seriously.

If no interest is charged and no repayment terms are set out, HMRC is likely to view it as a gift, not a loan. This has different consequences depending on your circumstances.

Interest and corporation tax

If your company lends money at no interest, or at below the market rate, this can create a problem. The company is missing out on interest income that it could reasonably have earned. HMRC has powers to adjust the interest charged if it considers the rate too low, though in practice this is rarely pursued for family loans unless sums are very large.

A sensible approach is to charge interest at a modest commercial rate. The current bank base rate sits at 5.25% (as of the 2024/25 tax year), so charging 2–4% interest is defensible. The interest received by the company is taxable income and must be reported in your corporation tax return. However, the family member may be able to claim the interest as a deduction if they’re using the money for business purposes.

Keep records of any interest paid. This should ideally be documented in your loan agreement and tracked through your company accounts.

Director’s loan accounts

If you’re a director and the company lends you money (or a family member you control), this is recorded in a director’s loan account. These are tracked closely by HMRC because there’s scope for tax avoidance.

The key rule: if a director’s loan account remains overdrawn (i.e., the director owes money to the company) at the end of the company’s accounting period, the company must pay corporation tax at 32.5% on the outstanding balance. Additionally, the director may face a Section 455 charge. This is a significant penalty, so it’s important to understand the implications before proceeding.

If you’re lending to a family member who isn’t a director, the rules are less onerous, but proper documentation is still vital.

Practical steps to take

Document everything. Write a simple loan agreement setting out the amount, interest rate, and repayment terms. Keep it with your company records.

Record it in your accounts. Show the loan in your balance sheet as a receivable (money owed to the company). If it’s a director’s loan, it should appear in your director’s loan account.

Ensure repayment actually happens. If the loan is documented but repayments never materialise, HMRC may question whether it was a genuine loan. Where possible, set up a standing order or make regular repayments to demonstrate commitment.

Report interest correctly. If you charge interest, make sure it’s recorded as income in your corporation tax return.

Consider the bigger picture. If the family member is unlikely to repay, a gift might be more straightforward, albeit with different implications for inheritance tax and personal tax matters.

What about gifts?

If you decide to gift money instead, this sidesteps loan documentation concerns. However, gifts from a company to a shareholder are treated as distributions, which may trigger corporation tax. Gifts to non-shareholders (such as employees) may also carry employment tax implications. The tax treatment of gifts is complex and depends on your exact circumstances.

Conclusion

Lending money from your company to a family member is perfectly lawful, but it requires careful structuring. The key is documentation, clarity about whether it’s a loan or gift, and understanding the specific tax rules that apply to your situation.

For tailored advice, contact Severn Accounting — we’re here to help.