Money Box Life: Lending to Loved Ones

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1:01sell or attain any specific investment or service. Hello. Helping someone you love by lending them money can feel like the simplest thing in the world. And when you're struggling, borrowing money from someone you're close to can feel like the obvious answer. But what happens when it doesn't go to plan? With hindsight, never a lender or borrower be. Just don't do it. We will hear more from listener Barry very soon. And we're also going to ask how you can make sure you don't scupper your finances or your relationship. Figures suggest one in four of us borrowed from a loved one in the last year. So today it's one of our special Moneybox Life podcasts, looking at the tricky world of lending to friends and family.

1:44I've lent money off my family so many times and I don't think it's helpful. My mum always would lend me money for nights out, shoes for anything. Probably owe her about£3 ,000 now. And did you say you were going to pay it back? Yeah, and I always have tried to chip away at it, but we fell out loads of times about money because Sometimes I'd say I'm gonna give you 200 pound on Friday and I wouldn't Someone asked me to lend money. I end up just giving it them I do that a lot and if someone asks for a tenner, I just say oh you can have it It's very rare someone will ask for money these days unless they really need it Fortunately our five children have got good jobs.

2:20I can't see them coming to us more more us to them Oh, they're the rich ones now. I'd just like people to stop borrowing it off me. That'd be great, really. So then I'd have more money. Just stop asking me. That'd be nice. Thank you. Thank you to those people in Stockport speaking to our producer, Sarah Rogers there. Now, listening to that are today's experts. I'm joined by Melinda Giles, a partner at the law firm Giles Wilson, who specialises in family law, and Peter Tutton, director of policy at the debt charity Step Change. Hello. Hello. Great to have you both with us. Melinda, I can tell from the emails we're getting already, this is a thorny area.

3:01It certainly is. And I loved your introduction that it should be simple and obvious. But of course, your listener Barry has clearly been scarred and has realised that it is definitely a thorny area. The amount, what your expectations are, we could go on. We could go on. We will go on because we'll hear from Barry in just a moment. But Peter, So it is something that a lot of people will have to consider, isn't it? Whether they're, I don't know, trying to support their children, bailing out a friend, a lot of us will face this kind of request. Yeah, that's right. And we see people who come to advice from us about sort of 20 % of them, one in five, have had to borrow from friends and families, often to deal with the difficulties they're in.

3:42But there are some simple things here to think about, you know, what are the reasons you want the loan for? Can you afford it? Can they afford it? Are there other options? So there's some things that people can think about, managing those risks are the things that people spoke about. Melinda, what about legally? Is there any kind of difference when you lend money to friends over family? Not really. I suppose perhaps with family, quite often people think it's an advance perhaps on something they're going to inherit one day. Maybe that's a fair assumption. Maybe it's said in that way, even if it is.

4:19It really should be documented as in, is this a gift in advance of your inheritance? What about if there's potential tax attributed to it? But essentially, there isn't really a difference between friends or family. OK, well, I think we might touch on that later. We've had people getting in touch about exactly that. Peter, a lot of the emails that we are getting are from people who've lent quite large amounts of money. Is it more common for people to borrow smaller amounts here and there? Although I suppose those also add up. Well, I think that's it. It'll be a bit of both. It can add up. And when we look at the average amongst the people that are coming to us from help, it's about£3 ,800.

4:59So that's quite a large amount. And that's probably built up where people are sort of seeking support for various different reasons. So, yes, it can get quite large, which is why this thing about can you afford it, can the person lending the money afford it, is important. OK, well, let's hear it from one of the larger sums. One of the reasons for today's Moneybox Life is an email that we received from a listener. We're calling him Barry, which isn't his real name. And he contacted us to say that he had lent tens of thousands of pounds to someone he thought of as a family friend to help with their business.

5:32He says the money wasn't repaid on time. And in the end, he had to get debt collectors in to recover the cash, which he also found really hard. These cases can be really complicated with lots of painful details that we simply can't get into. Barry did eventually get around three quarters of the money back, but he told me never again. With hindsight, never a lender or borrower be. Just don't do it. Unless you have the money to throw away, I just wouldn't advise it. It causes such a strain on relationships, obviously. And it's money that I can ill afford to lose because it was compensation I got for an injury.

6:16which left me disabled. I wonder if you can describe to me how you felt when you realised that this money you'd lent as a favour to essentially a family friend was perhaps not recoverable, that you were going to have to fight for it. I felt angry and really embarrassed. I just felt stupid and totally powerless. Do you think your friend borrowed the money in good faith? Yeah, I think possibly if it had been me, I'd have just gone and borrowed the money from a bank, whatever, to pay me, to pay the person back. It would have been my first priority. And I just feel such a sucker, really. Poor Barry.

7:03There's those feelings of embarrassment really, really hard to hear as well. Melinda, it almost sounds like a scam, doesn't it? But I had a long chat with Barry and it wasn't. It was a genuine friend. It was a genuine request and it genuinely went wrong. If you are lending to friends or to family, what's the point where it goes from an informal IOU to something that you really ought to put into a formal agreement? Well, firstly, I feel desperately sorry for Barry because he clearly was genuinely wanting to help. I think something that we should be warned and aware of is that why has that person come to not you but to someone other than a traditional lender such as a bank for that amount of money.

7:49It would usually be because they can't borrow it from a bank or somewhere else because they don't have the assets, the business plan, whatever it is that's required for a formal loan. So in that sense, you know, there is a pretty good chance that they're not going to have the money at the end of the day unless something goes spectacularly well for them. It sounds as if Barry did as much as he could of the right thing because he was able to recover a certain amount of money. So it must have been documented somehow that that money was owed to him. I presume the problem was that person just was unable to repay it.

8:27so when should it be documented formally or formal advice taken honestly I think it's when that money is so important to you that you personally can't afford to lose it as in Barry's case that money was all his savings presumably because it was a damages claim and therefore it was critical to him that he got it back somehow. Peter this is a good point isn't it we often trust our friends and our family but with before parting with a large sum there can be some red flags melinda outlined one there the fact that they were going to someone they knew rather than to a bank what other red flags might there be that suggest a loved one might need financial advice or debt advice rather than a loan so so firstly if the that thing about you know reasons so if the reason that person that the person is seeking to borrow is because they're struggling you know with other borrowing, they've maxed out their credit cards and they've got to hone their budget because of other credit commitments and things like that.

9:26That's a massive red light. So credit's good for lots of things. It's good for spreading expenditure when you can afford to pay it back. If you're using credit to deal with a desperate situation of not having enough money, it usually makes things worse. The other red line to look out for is if that loan has aspects of sort of commercialness in it. So if the person said, well, I'll give you a loan, you know, it's a friend or a friend of a friend can give you a loan and it's charging interest. Be super wary. You know, this is loan shark territory. And we do see people who've had loans that they describe as a loan from a friend or a friend and a friend.

10:02It's charging interest. It's a loan shark or probably a loan shark. And that's a world of pain that people don't want to get into. Absolutely. Melinda, you've talked about sort of the importance of documenting it. Can you draw up an agreement yourself if you don't want to use a solicitor. Is that legally binding if things then do go wrong? Well I'm afraid I'm going to sound like a proper solicitor now and say without seeing that document I can't say if it's legally binding but certainly having a paper trail in writing that it was intended to be a loan not a gift perhaps the timing on and how it's to be repaid it's better than nothing.

10:38Although even then someone who doesn't want to give their name has emailed to I sold my house and put the money into my son's house,£350 ,000. I have a small annex in his garden. It doesn't belong to me. I'm now getting older and want to release the money. I do have an agreement through a solicitor, but would have to take them to court to get it. I can't bring myself to do this. I do advise people to be very careful. That is one of the challenges, isn't it? You bring emotions into these financial agreements. Barry says he's never doing it again. Is it always a disaster, though? Let's talk to Rebecca, who is on the line.

11:10Rebecca, hello. Hello there. Good to have you with us. Now, you lent your friend a bit of an eye-watering sum,£50 ,000 as a bridging loan. Yeah,£52 ,000. £52 ,000. And this was to cover a temporary funding gap. They were selling their home. They were buying another. Tell me how it went and if you're still friends. Of course we're still friends, yes. We've known each other for 40 years. We were at university together. So, you know, utterly trust my friend. and yes, the loan was repaid within months. And you actually, I mean, you'd been sort of in from the beginning. You'd actually been helping your friend choose her new house.

11:48So you were quite invested from the start of the process. Well, I mean, just as a, you know, as a friend would, you know, saying I'm going around to do properties. What do you think? Do you want to come? So I wasn't, you know, you must come and see this property. I just happened to be staying with her when she was looking for her property in the new town where she was living. So I knew the process. And when it came to£52 ,000, was it just a case of kind of pressing send, handing the money over? Or did you have to have your own finances looked at? Yes, because it was part of the house purchase, her convincing solicitors wanted to know where she was getting the money from because she was buying the new home before the old home had completed.

12:33So there was going to be a gap of two or three, four months between the two transactions. So the conveyancing solicitor needed to do all the checks that the money that was coming from me wasn't that I actually had it and I got it from a valid source. I wasn't money laundering. They have to do those checks under the money laundering rules. And you did you did all the paperwork for this. You had it drawn up properly and you are actually a bit of a financial expert yourself, aren't you? So you might know more than a lot of people about how to do this safely. Well, yeah, I mean, I'm a retired accountant now, so I'm an accountant and tax advisor.

13:12So, you know, in my work when I was working, I would have seen loan agreements. And I just know it's a good idea to have something in writing. And it's quite easy to draw up a loan agreement where you can find a template online. I sympathise with the solicitor you had on the saying you've got to check that it would be legally valid. But it was really between the two of us thinking, well, if something happened to one of us, should we die before the loan was repaid, there needs to be some evidence that this money did flow between us. That's a very, very good point. Yes. What about, though, the friendship?

13:54Clearly, this is somebody who's incredibly important to you, a four decade long friendship. Did you not have any worries that this was such an important friendship and that bringing money into it might put it at risk? No. No, I utterly trust my friend. I mean, she's like a sister to me. I mean, she named her youngest child after me. So that's the sort of bond that we had. And when I had some significant health problems, I had a serious operation. She came down from Scotland to look after me while I live in the south of England. So, you know, that's the sort of relationship we have. Well, that does sound like a beautiful, beautiful friendship.

14:38Rebecca, thank you so much for joining us and talking us through the potential upsides of lending to friends. No problem. Thank you very much for your time, Melinda. I imagine you were probably cheering listening to that because when done right, money lent, documented, repaid, and they're still best friends. Well, it was lovely, wasn't it? And clearly the caller was informed, aware, the proper processes, and a long, honest friendship, perhaps with transparency over their financial position. And she makes the good point, of course, that there was the property transaction going through, so the source of funds was checked.

15:14She knew she would be repaid. I mean, I suppose the only issue could have arisen if the friend's property didn't sell as expected. But I'm assuming that the caller had thought that through and taken her chances. But yeah, very cheering story. But it was, of course, done properly. Done properly. And she definitely sounded like she knew what she was doing. Peter, in some cases, is borrowing from friends and family better than getting formal credit? Because I suppose it won't harm your credit score. So there's a number of ways we're borrowing from family and friends. So it wasn't the fact that your credit's good.

15:46On the other side of that, you don't get a positive credit record if you pay it back. So there's two sides to that. But obviously, if it's from a genuine loan from a friend or family, that may be a loan that's sort of soft in terms of the flexibility of repayment. If it's interest free, so you're not racking up costs. So there sure are some advantages. You know, the idea of sort of friends and family helping each other out is a really good one. But the key thing is that you both know what you're doing. both parties go into it with their eyes open it's affordable you sort of understand and have a conversation about what the risks and what the pitfalls could be how that will work how it will be paid back what both parties need and as part of that conversation is also about well what's the loan for so if it's something like a bridging loan it's a purpose that's one thing if it's something that's a pattern that may need a different sort of help like someone who's struggling with financial difficulty and it's a different sort of help then a conversation about that like a family member saying, well, actually, you don't need this, you need this, might prompt someone to get the help that they...

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17:50We're getting a lot of really quite emotional emails through from people. We've had a very sad email from a listener who says her father lent her money for her mortgage but wouldn't say where it was coming from, and it turned out that some was from his partner and needed repaying almost immediately. She says she hadn't known that up front. she paid the money back but she says I now don't have a relationship with my dad or his partner at all as he was angry that I was upset at being deceived and that I should have been grateful and somebody else says I lent my dad over£12 ,000 to help support his mortgage payments while he was struggling with a change in jobs that was three years ago and it was never documented I was only 21 at the time I have no idea how to approach the conversation lots and lots of emotion coming through in this.

18:33And it can be emotional, but as I mentioned, figures suggest around one in four of us borrow from family and friends when times are tight. A survey from the not-for-profit Fair For All Finance found that many of those people, though, they're asking for smaller amounts, around£250 or less, often to help pay for essentials like food and bills. Let's hear from Shane, who's a veteran and an ambulance worker, and told us he's unable to work at the moment and he's struggling. I've got two children, I've got a wife, I've got two dogs. And it just came as a bit of a shock, really, because I didn't realise how hard it would be.

19:10I borrowed some money off my mum for some shopping. If we didn't have as friends and family to borrow money off, like towards the end of the month and what have you, then my children wouldn't eat. So, like, my wife's gone through the checkout, her card's declined, she's checked her bank, and she'll be short by a few pounds. So then she'll have to ring somebody to borrow it off to pay it. Like she'll come in the car and she's done it many times. She'll sit in the car and she'll just cry. It's not nice because me and my wife were too proud to go to a food bank. So we'd rather just ask. It's a vicious cycle because if we borrow 20, 30 pounds off somebody, then we'll budget our money, but we'll also budget the 20, 30 pounds back to the person that's lent it to us.

19:56And then so we've got a smaller budget every month. And then when we come to the end of that smaller budget, we're having to borrow that£20,£30 again. And then it's just a circle, round and round in circles. And it's just it just feels like it's never going to stop. It makes you feel horrible as a person, you know, having to ask somebody else for something. If you owe somebody money, then that can always come between you. I've had arguments a few times. Thank you very much to Shane for that, for just setting it out. Peter, your charity StepChange deals with debt. You're actually helping, Shane.

20:30You've mentioned that you are seeing quite a sizeable number of people in debt to family and friends. Is that rising? Is that changing? So the number's been stable over the last four or five years between about 17 and 15 percent. So it's a sort of stable proportion. And particularly what we see at StepChange is people who, you know, Something's happened to them, lost their jobs, something, a life shock. And then that pattern of borrowing that Shane has described, that you do it to get through. But that thing about it makes the hole a bigger hole in next month's budget. So it gets bigger and bigger and bigger.

21:08So what we tend to see with people with friends and family loans is that they'll have other credit as well. And what it is, is people that are just trying to manage and juggle. And that's the bit where kind of, well, look at other sources of help. because if the reason why you're struggling is under the burden of credit debts, if you seek debt advice from StepChange or another free debt advice charity, we can help look about rescheduling that debt. We can look and see if there are other forms of help available, things that you may be entitled to, ways of reducing some of your bills that you don't know about.

21:38So there's a bunch of options there for people. Reach out and talk to someone like to StepChange or another free debt advice charity. It won't cost you anything. There's no obligation to do anything. You can just get some help and information and then help to act on that if you want. And anyone listening who's trapped in that cycle, that's good advice. What about, though, Peter, if people have turned to family and friends because they've got maxed out credit cards or they can't pay their utility bills, do those companies have legal obligations to their customers in debt? So they do. So the example is the sort of credit cards.

22:13So there are rules about what's called forbearance, which is where people are struggling to repay, how firms should help them, similarly with energy companies. So what we would expect those firms to do is not ask people to repay more than they can afford to repay, to show proper consideration of the circumstances they're in, not to kind of threaten to escalate that debt to enforcement. So there are rules about that. Energy firms, credit firms should be accepting affordable repayment or sort of holding on an understanding if people have no money at that point of time, working with people to reduce their problems, not make them worse.

22:51And you mentioned loan sharks already and people who are very vulnerable in debt. They can be vulnerable to people who act like friends. And that's sort of how loan sharks operate. What are the warning signs? So again, you know, be very careful is the first thing. I mean, the warning signs are who is this person? If it's a friend of a friend, do you really know them? Why are they lending? Are they lending to other people? So if it's a business but they're not actually a properly regulated credit business, is it a friend loan but then they're charging interest on that? These are all big red flags.

23:25And as I say, if you find yourself in that situation, really don't go there. don't sort of take any money off any of it's a friend's advocate, unless it's really a friend and you've really had a conversation about things like paying it back. If it's someone that's kind of an acquaintance, particularly if they tell you they're going to charge you for it, so it's a kind of a business, but not an above-board business, you know, that could be criminal behaviour. And what we know from loan sharks is that when the loan sharks get their hooks into people, the sort of techniques to recover money and to intimidate people are not very good.

23:58There is help available if you are a victim of a loan shark. There's a website called Stop Loan Sharks, which has got information. So if people are struggling, you are in the grip of a loan shark. Really do reach out and get some advice and get some help on that. Thank you very much. It's good advice. OK, well, we've talked about how lending money to a loved one might feel informal. But will HMRC agree? Richard is in his 80s and he contacted Moneybox with some concerns about exactly that. I've found it difficult to keep up to date with all the tax changes. I'm 81, so I don't know how long left I've got, but I don't want to leave a mess for my children.

24:39Over the years, my wife and I, we live fairly frugally. Over the course of our married life, and we've got five children, we've helped one child out with a large debt, another child helped to buy a house, and another child was out of work for six months, and we gave them large amounts of money. I'm just wondering how they all would stack up and would it incur them any penalties on our death? Richard, thank you very much for sharing that question with us. Now, this isn't an inheritance tax programme, although we have had inheritance tax programmes, so please search Moneybox in BBC Sounds to find our other programmes that might be helpful.

25:19But, Melinda, Richard and his wife don't want to leave a mess for their children. It's very, very thoughtful. Are loans different to gifts and should he do anything to make it clear if they weren't loans? Yes, loans are different to gifts. So perhaps if Richard has got a will intending to leave everything that he and his wife, if they both have wills, but equally between their five children, is there a reckoning at the end of the day, i.e. do those gifts or monies paid before they die, they've died to the three that he mentioned, was that on account of the one-fifth share or not? Was it a loan that needs to be repaid to the estate so that everybody starts the same?

26:07Or, you know, so yes, he should make it clear or they should make it clear on what basis that was done. This is very, very important, isn't it? Because I think things can get really complicated and really messy because it might not be them deciding what happens. It might be that one child thinks the payment was a gift and another member of the family says it was really a loan or an advance on their inheritance? Oh, it's crucial. And it's understandable that people may have very strong feelings about that. It may be based on misunderstanding. It may be based on their own financial position at the time, or it might simply be because people don't understand what the intention was.

26:43So yes, and you know, without going into the inheritance tax aspect of it, if in fact their estate was subject to inheritance tax, it becomes even more complicated, because would that prepayment carry the weight of inheritance tax or not on it? So I would really recommend if somebody finds themselves in that position, whilst they're still well enough to, that they organise it all and preferably make sure that the people who've received those sums of money agree with them as to what the intention was. Well, Richard says he told us he wants to speak to a professional about this, but he didn't really know where to go and he says he struggles with his sights, so he'd rather speak to somebody.

27:24How can he make sure he's getting the right advice? Well, I would say go and see somebody about making a will because this is all part and parcel of the same thing. Thank you. Melinda, I suppose one important question people might have is how do you go about saying no if a family member or a friend asks you to borrow? Because quite often when someone's asking for help, they're in trouble or they think they really need that help. I really don't have the answer as to how you would say no but I suppose you would really ask them what the reason is. If somebody's prepared to ask you to borrow money from you, then hopefully there's that level of openness that they can share why and therefore make a plan.

28:07It might be that there is something solid coming around the corner where they can repay it. Or it may be that there is a way of coming to an arrangement. There are schemes such as equity release against properties, formal loans with banks, with repayment schemes. So it might be that there's a solution that that person just hasn't worked out yet. And if they really are a loved one, then they can probably chat to you about it. Thank you very much. Well, that's all we've got time for in today's podcast. Thank you for lending us your ears. And thank you to Peter Tutton from Step Change and Melinda Giles from the law firm Giles Wilson.

28:42Paul Lewis will be back at midday on Saturday with Moneybox, looking at how hundreds of thousands of people are missing out on benefits they are entitled to. Remember to tell us if there is a story or a topic you want us to look at. Barry's email was the reason for today's entire programme. And here he is again to tell you how to get in touch. If you want Moneybox Live to look at a story or even appear on the programme like I did, then get in touch. You can email moneybox at bbc.co.uk or send the team a message or voice note on WhatsApp. The number is 0-3306-783-183. They really do read and listen to every message.

29:24Thank you very much, Barry. We really do. In this podcast, the producer was Sarah Rogers, the studio manager Wayne Parks, production coordinator Catherine Lund. Our editor is Jess Quayle. I'm Felicity Hanna, and this was a BBC News money and work production for BBC Sounds. Please welcome your Any Questions panel. Hello, I'm Alex Forsyth, host of Radio 4's Any Questions. If you don't know the programme, this is what it's about. Every Friday, I'm joined by politicians, journalists and public figures who answer questions directly from a live audience, giving you real views, real challenges and real conversations about the issues shaping our lives.

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