Family Loan Agreement

This family loan agreement is a version of our standard loan template that has been customised for use between family members. It does not provide for the giving of any type of security against the loan. For this reason, we recommend you use it only:

• between close family members, and
• where you trust they will have the wherewithal to repay the loan when it is due.

The template is in the form of a short agreement, which you will find easy to use. (Do not use this template for a loan to a family-owned company – instead use one of our standard, guaranteed or secured loan agreements for that.)

Using this Family Loan template

Once you have bought the family loan agreement template, you can download it in Word format. You can then easily edit the document to suit your own requirements.

We have drafted the template contract in a flexible manner, to provide for a range of situations. For example, you may decide to charge interest or not to. We have designed the agreement to accommodate both options.

We will always store a copy of the template in your Legalo account. When we update the family loan agreement template, a copy will automatically be available to you in your account free of charge. You will always have an up-to-date copy at no further cost to you. So if you ever need to use the agreement again, just log back in.

Why put in place a written contract?

Even if you are making a family loan, it is prudent to record the loan in writing. One benefit of a written family loan agreement is that you can prove the money was a genuine loan, rather than income or a gift.

Another advantage is that, when people within a family agree a loan, they sometimes make it in a very flexible manner. For example, the lender might not ask for repayment for many years. In such circumstances, a written record of the family loan will make sure that you all remember:

• that it was a loan and not a gift,
• what was originally agreed, and
• the amount lent.

This can assist unnecessary arguments later on.

Guide to this Family Loan template

When you buy the template, it comes with a helpful guide to completing it – a walk-through of all its clauses. This makes it very easy for you to complete. For a preview of a very similar guide, please have a look at our guide to our standard loan agreement. Please note the family loan agreement template does not include the clause 6 covenants which that guide mentions. Neither does it include references to making the loan to a company.

FAQs on Family Loans

Below we address the most popular questions from the Internet about family loan agreements.

How do I make a loan agreement between family?

While loans between family can often be flexible and informal, it is always a good idea to get a contract in writing to avoid any miscommunication and keep everything civil. Our template is the quickest and easiest way to draft a family loan agreement. It includes prompts for every piece of information you will need to draft your agreement, so all you need to do is fill in the details and your agreement is ready to be signed.

Does a family loan agreement have to be in writing in the UK?

A family loan does not have to be in writing in the UK, however it is strongly advised to do so for a number of reasons. A written agreement provides clarity regarding a loan, and written evidence can prove extremely useful in the case of possible disputes in the future. This also means that a written documentation of a loan is legally enforceable, more so than a simple verbal agreement. Not only does it clarify evidence of numbers and dates, it also shows indisputable evidence of intent, making sure all parties understand that the loan is not a gift.

Having such an agreement in writing enables a signature from both parties, making it clear that all has been communicated and understood before the loan is made. If the loan is not repayable in the near future, having a written agreement in place may be very important in case the person passes away before the loan is repaid.

Can you make an interest-free loan to a family member in the UK?

Yes, you can make an interest-free loan to a family member. That is no problem and we have made it easy to do using this template. Our template allows for either an interest-free loan or a loan with interest. It is important to remember that while an interest-free loan may seem like a less formal agreement, it is still recommended to get this agreement in writing and properly drafted. That serves as evidence that the loan (a) was actually made and (b) is repayable and was not a gift.

Can you legally loan money to family?

In the UK there is no law that prohibits lending money to family members, but it is vital to treat any loan with careful consideration to protect yourself and any other parties. Your having written evidence of making the loan, helps you to avoid future arguments within the family.

Can family agreements be legally binding?

Family loans can of course be legally binding. It is key in these cases for your family loan agreement to meet a set of criteria to make it a legally enforceable contract rather than one based solely on trust. Make sure to be clear about the following:

1. Offer and acceptance. The offer must be clearly stated and agreed to upon by both parties demonstrating a mutual agreement.
2. Consideration. Both parties must provide something of value as part of the agreement.
3. Intention to create legal relations. It must be made clear that the intent for both parties is for the agreement to have legal consequences.
4. Capacity. Both parties must be willing and able to enter into a contract. They must be of sound mind, not under duress, and over 18 years of age.
5. Clarity. The terms of the agreement must be clear and easy to understand, to ensure that all parties know what they are entering into.
6. Legality. The agreement must, in itself, be legal. Anything that goes against UK law will be unenforceable.

Once your loan agreement meets these criteria, it can be legally binding. Legalo’s template helps you meet all these criteria.

Can I write up my own legally binding family loan agreement?

It is possible to write up a family loan agreement yourself, and with the use of our template you can be sure that no important information will be missed, and your contract will therefore be legally binding once both parties have signed.

How do you write a loan agreement between two people?

By filling in the details of the two involved parties, you can use our template to create a contract for a loan between two people. All you need to do is follow the written guide to completing the template and include the required information for both parties.

How do you calculate interest on a family loan?

When creating a family loan agreement in which the borrower needs to pay interest, you will need to calculate exactly how much interest they will need to pay. Your contract needs to specify the interest rate, so that both parties can agree on it. By completing the following sum, you can work out how much interest the borrower will owe to the lender:

• Annual interest = Loan Amount x Annual Interest Rate

If the lender does not collect the  interest annually, but instead periodically (e.g. monthly or quarterly), then divide the annual interest by the number of periods in a year, to work out the figure for each repayment period.

• Periodic Interest = Annual Interest / Number of Repayment Periods

To calculate the total interest, simple multiply the Periodic Interest by the total number of repayment periods.

• Total Interest = Periodic Interest x Total Number of Repayment Periods.

What makes a valid loan agreement?

For a family loan agreement to be valid, we advise that you write it up in the form of a legally binding contract. While verbal agreements can be valid, a written agreement provides much clearer evidence of the terms and the intent in the case of any disputes in the future. You don’t want someone to later dispute (a) receiving the loan, (b) the amount of the loan or (c) that is was repayable and not a gift.

How much money can you loan a family member in the UK?

There are no strict legal limits dictating how much money you can loan to family. However, it is important that you consider the following:

• Does the borrower have the financial means to pay you back under the terms stated in the agreement? Make sure this is something you consider before signing them onto a legal obligation to make these payments. If they become bankrupt, you will not get your money back.
• If you are loaning a large sum of money to a family member, consider the effect this may have on family dynamics, especially if the borrower breaches its terms or struggles to pay back the loan.

Do I need a witness to sign a family loan agreement?

The law does not require that you have a witness or notary present when you sign a family loan agreement, but can be a good option when it comes to adding authenticity and clarity to the contract. A notary as a witness can provide proof that the borrower entered the agreement willingly.

Do you have to pay tax on a loan from a family member?

Generally, loans from family members aren’t subject to income tax. However, if the borrower does not repay the loan, HMRC may treat it as a gift and it would then impact inheritance tax.