You’ve advanced £10,000 to your son for a flat purchase, with nothing in writing—just a handshake and trust. This gesture, commonplace in thousands of families, can turn into a legal nightmare when your estate is settled. Without documentary proof, this informal loan can look remarkably like a gift, and that is precisely what HMRC or your other children may decide it really is.
The answer lies in one principle: an undocumented loan can be recharacterised, brought back into your estate for inheritance tax purposes, and become a source of conflict between beneficiaries. Without a loan agreement or written acknowledgment of debt, you have no straightforward way to prove it was truly a loan and not a gift. It is this absence of evidence that changes everything.
An Informal Loan: The Risk of Recharacterisation as a Gift
Legally, a loan requires an obligation to repay. Without a signed document, no repayment schedule, and no record of actual repayments, HMRC or the other beneficiaries may decide that the money advanced was really a gift dressed up as a loan. The distinction matters greatly: a gift forms part of the deceased’s estate for inheritance tax calculation, whereas a genuine loan that has been repaid does not.
HMRC looks particularly at whether there have been regular repayments. If your child has never paid back a single pound over years, the loan argument becomes weak. Often it is only when HMRC reviews the estate, or more commonly when probate is being dealt with, that the question resurfaces and recharacterisation is demanded by another beneficiary who feels unfairly treated.
What Counts as Evidence of a Real Loan
Under UK common law, a family loan does not need to be in writing to exist, but the absence of documentation makes proof far more difficult if the loan is later challenged. HMRC says it looks for either a written or oral agreement at the time the money was advanced, or conduct showing the borrower accepted it as a loan—such as a record of repayments, correspondence, or other contemporaneous evidence.
A bank transfer alone, even with “loan” noted in the payment reference, is not legal proof that both sides intended a loan. Only a formal written agreement, or clear evidence of repayment behaviour, allows you to establish the facts before the situation becomes contentious.
The Impact of an Undocumented Loan on Your Estate
Recharacterisation as a Gift and Treatment in the Estate
If the loan is recharacterised as a gift, it forms part of your estate’s assets for inheritance tax purposes. The child who received the money sees their share of your estate reduced to account for this earlier advance, in order to maintain equal treatment between all your beneficiaries. This is meant to ensure fairness, but it often has the opposite effect: it creates resentment and dispute.
Disputes Between Beneficiaries: Proving the Loan
This is often where tensions begin. The other children, discovering the transfer when probate is being dealt with, demand answers. Without a contract, the executor or solicitor can only rely on what is provable: bank statements, witness accounts, emails, and letters. The family conflict that results can last years, with legal costs eating into the very estate everyone was hoping to preserve.
A Common Scenario Probate Solicitors See Often
A father transfers £30,000 to his daughter in 2018 to help start a business, with no paperwork. When he dies in 2026, his son discovers the bank transfer. Without a loan agreement, the executor brings the sum back into the estate as a presumed gift for inheritance tax purposes. The daughter must make a financial adjustment to her brother, even though she had assumed in good faith that she was simply repaying part of the sum through her practical support to her father over the years, without ever recording it formally.
Essential Steps to Protect an Informal Family Loan
Draw Up a Loan Agreement or Acknowledgment of Debt
A document signed by both parties is enough to remove ambiguity. It should state the amount, the date the money was handed over, the repayment terms, and ideally be kept safely to provide evidence. This takes little time and avoids years of dispute between siblings.
A sound loan agreement should set out:
- the exact amount lent and the date of transfer,
- the repayment schedule, even if modest,
- whether there is an interest rate or not,
- what happens if repayment does not occur.
Should You Charge Interest?
There is no legal requirement to charge interest on a family loan; an interest-free loan between parent and child is perfectly valid. However, the complete absence of repayments over many years strengthens the suspicion that it was really a gift. A regular repayment, however small, remains the best evidence of a genuine loan if it is later challenged.
A Loan or a Gift: Choosing the Right Approach
It depends on your true intention. If you genuinely wish to help without expecting repayment, it is better to acknowledge the transfer as a gift outright and benefit from the inheritance tax allowances available, rather than disguise a gift as a false loan. Conversely, if repayment is genuinely expected, a written loan agreement is the safest tool.
| Approach | Repayment Expected | Effect on Your Estate |
|---|---|---|
| Written family loan | Yes | None, except any outstanding balance |
| Declared gift | No | Forms part of estate; inheritance tax allowances apply |
| Small personal gift | No | None, if proportionate to your circumstances |
| Undocumented loan | Unclear | Risk of recharacterisation, likely dispute |
A small personal gift, appropriate to special occasions and proportionate to your wealth, falls outside these rules entirely. But once a sum becomes significant, only a clear written agreement—whether loan or gift—protects your family against the disputes that almost always surface at the worst moment: when your estate is being divided.
