Intra-Family Loans: Tax Planning for IHT, Investments, and Property

Loans between family members, or between an individual and a family trust, can be a legitimate and tax-efficient element of an estate planning strategy when structured correctly. Equally, poorly documented or poorly structured loans can create significant tax problems — generating taxable employment income, triggering beneficial loan charges, or failing to achieve the IHT planning objectives they were designed to deliver. This guide sets out the key rules and considerations.

Why Use Intra-Family Loans?

Family loans are used in several estate planning and tax planning contexts:

• IHT-efficient wealth transfer. A loan to a trust (as opposed to an outright gift) allows the lender to retain a debt asset in their estate while transferring future growth outside their estate. If assets grow within the trust, that growth accrues to the trust beneficiaries rather than increasing the lender's taxable estate.
• Funding property purchase for adult children. A parent who lends to an adult child for a property purchase retains a debt in their estate (reducing eventual IHT exposure relative to a gift), while the child benefits from access to capital at a low rate of interest.
• Business funding. Shareholder loans to family companies are common for working capital or growth finance.

In each case the structure only works as intended if the loan is genuinely a loan — documented as such, with arms-length (or close to arms-length) terms, and consistently treated as a debt in estate valuations and accounts.

The HMRC Official Rate of Interest

HMRC publishes an "official rate of interest" (ORI) relevant to employee beneficial loans (under ITEPA 2003). As at 2026, the official rate is 3.75% per annum (it rose from 2.25% to 3.75% on 6 April 2025; HMRC updates this rate periodically — always check the current rate at gov.uk). However, the ORI is primarily relevant to employment-related loans, not to simple intra-family arrangements between individuals.

For intra-family loans, the more directly relevant concept is whether the loan is on commercial terms. HMRC does not require all family loans to bear the ORI specifically, but it scrutinises:

• Whether the loan has a genuine repayment obligation.
• Whether interest, if charged, is paid and not just accrued (unpaid interest can itself create complications).
• Whether the loan terms are consistent with a genuine creditor-debtor relationship.

For loans between UK individuals and their own trusts, or between UK individuals and family members, HMRC's challenge often focuses on whether the arrangement is a disguised gift rather than a genuine loan. This is particularly relevant for IHT purposes.

Interest-Free Loans Between Individuals

There is generally no income tax charge on a simple interest-free loan between private individuals who are not in an employer-employee relationship. The deemed interest charge under ITEPA 2003 applies only to employment-related beneficial loans.

However, interest-free loans can create problems in other contexts:

• IHT. An interest-free loan to an individual does not in itself attract an immediate IHT charge. However, if the loan is on uncommercial terms and the overall arrangement is found to be a gift with reservation (under IHTA 1984, s.102), or a "settlement" for IHT purposes, the tax analysis changes significantly.
• CGT. If assets are transferred at an undervalue in connection with a loan arrangement, CGT may apply to the transferor (TCGA 1992, s.17 and s.18).
• Trusts. Interest-free loans to trusts are scrutinised under the "associated operations" rules and the arrangements must be carefully documented.

Loans to Trusts for IHT Planning

A loan from a settlor (or their estate) to a discretionary trust is a well-established IHT planning technique. The mechanics are:

1. The settlor makes a loan (often interest-free) to the trust.
2. The trustees invest the loaned funds in growth assets.
3. Future growth above the loan amount accumulates within the trust estate and is outside the lender's estate for IHT purposes.
4. On the lender's death, the loan is repayable from the trust. The debt in the estate is matched by the repayment obligation, so the net IHT position is neutral relative to the original capital.

This arrangement does not reduce the lender's estate in the short term, but it "freezes" the value by preventing future growth from accumulating in the taxable estate. It is sometimes called a "loan trust" or "wealth preservation trust."

Key structural points:

• The loan must be genuinely repayable. If it is forgiven or released during the lender's lifetime (within seven years), the forgiveness may constitute a potentially exempt transfer (PET) for IHT purposes.
• The trust deed must include appropriate investment powers.
• HMRC may challenge arrangements where the loan is on uncommercially generous terms or where the lender is in reality a settlor with a reserved benefit.
• DOTAS (Disclosure of Tax Avoidance Schemes) obligations must be considered for loan trust arrangements marketed as tax planning schemes.

Loans to Adult Children for Property Purchase

Parental loans for property purchase are increasingly common as house prices make access to the property market difficult for younger generations. The tax considerations include:

IHT. A loan (documented as a genuine debt) reduces the parent's estate relative to an outright gift. On the parent's death the debt is an asset of the estate and is repayable by the child. If the child predeceases the parent, the debt becomes an asset of the child's estate.

Documentation. A proper deed of loan should be executed, recording the loan amount, interest terms (if any), repayment mechanism, and the property being purchased. The deed should be signed and dated and retained by both parties.

SDLT. The Stamp Duty Land Tax position on a purchase funded by a parental loan is the same as on any purchase. If the parent is a co-owner (rather than a lender), their stake will attract the additional dwellings surcharge.

Income tax. If the loan bears interest, the interest received is income in the parent's hands (subject to the personal savings allowance and income tax at the applicable rate). If the property is let by the child, the interest is not deductible from rental profits unless the loan was drawn to fund a business property (i.e. the interest relief rules for residential buy-to-let are restricted).

The Commercial Rate Requirement for Overseas Loans

Where a UK-resident individual makes a loan to a non-UK resident entity — for example, a loan to an overseas company in which they hold shares — the transaction falls within the UK's transfer pricing rules (TIOPA 2010) if the parties are "connected" (under the relevant definition). In practice this means that HMRC can challenge the interest rate on connected-party overseas loans and may attribute a market rate of interest regardless of what is actually charged.

For a loan to a non-UK resident family member (not a connected entity for transfer pricing purposes), the transfer pricing rules do not strictly apply, but the underlying commercial terms remain relevant to the overall tax analysis. HMRC may challenge the characterisation of an interest-free or below-market loan to a non-UK resident as a potentially exempt transfer or a gift for IHT purposes.

The precise tax treatment depends on the specific relationship between the parties, the jurisdiction involved, and any applicable double tax treaty. Professional advice is essential before making loans to overseas entities or non-UK resident individuals.

Deed of Loan Documentation

Regardless of the relationship between the parties, a properly executed deed of loan is essential. As a minimum it should record:

• The full names and addresses of the lender and borrower.
• The principal amount of the loan.
• The date of the loan.
• Whether interest is payable and if so at what rate (fixed or variable), how it is calculated, and when it is due.
• The repayment terms (on demand, over a fixed term, linked to a specific event such as property sale).
• Whether the loan is secured (and if so on what asset) or unsecured.
• What happens in the event of the lender's death.
• Governing law.

A deed of loan executed before a solicitor or notary provides the strongest evidence of the parties' intentions. The loan should be reflected in both parties' accounts, and any interest should be paid on schedule rather than merely accumulated as a paper entry.

Common Mistakes

Several common errors undermine the effectiveness of family loan arrangements:

• Failing to document the loan at all, relying on a verbal arrangement.
• Forgiving or writing off the loan informally without considering IHT or other tax consequences.
• Inconsistent treatment in estate accounts (e.g. claiming the loan as a debt in the estate while also arguing it was a gift for lifetime giving purposes).
• Failing to update the arrangement when circumstances change (e.g. when the lender moves overseas, or when the borrower's financial situation changes materially).
• Overlooking DOTAS obligations where the arrangement has been marketed as a tax avoidance scheme.

How Global Investments Can Help

Global Investments works with clients and their legal advisers to assess, design, and implement intra-family loan arrangements as part of a coherent estate and tax planning strategy. We can help you determine whether a loan trust, a property purchase loan, or a business funding arrangement is appropriate, refer you to specialist tax counsel or solicitors for documentation, and review the interaction with your overall IHT and estate plan. Contact us for a confidential discussion.

This guide is for information purposes only and does not constitute tax or legal advice. Tax rules relating to intra-family loans are complex and depend on individual circumstances. The HMRC official rate and other figures cited are as at June 2026 and are subject to change. Readers should obtain independent professional advice before implementing any loan arrangements.