Last updated: 16 October 2026
When is interest paid to a family member allowable for tax?
Interest paid to a family member is allowable against business profits when the loan is genuinely used for the business, the rate is commercial, and the interest is actually paid and recorded. HMRC looks at what the money was used for, not who lent it. If a relative lends £30,000 at 6% to buy equipment for your trade, the £1,800 interest is a business expense. The family member must declare the interest as savings income on their own tax return.
The tests HMRC applies
- Purpose: the borrowed money must be used wholly and exclusively for the business
- Commercial terms: the rate should be similar to what a bank would charge
- Evidence: a written loan agreement, with amount, rate, repayment terms and signatures
- Payment: interest must be paid, not just accrued indefinitely
Sole traders, landlords and companies
| Business type | How relief works |
| Sole trader | Deduct interest in calculating profits; cash basis capped at £500 unless all used for business |
| Landlord (residential) | 20% basic rate tax credit, not a deduction |
| Limited company | Deductible for corporation tax; may need to deduct 20% income tax |
Companies paying interest to individuals
If a company pays yearly interest to an individual, it usually deducts 20% income tax, pays it to HMRC through form CT61, and gives the lender a certificate. The lender can claim back tax if their savings allowance covers the interest.
What if the rate is too high?
If the interest rate is above a commercial rate, HMRC may disallow the excess, treating it as a gift or a way of shifting income to a lower-rate family member. Settlements rules can also apply if a parent pays interest to a minor child.
Example
Sam, a sole trader, borrows £20,000 from his mother at 7% to buy a van. The loan agreement is written and signed. Sam pays £1,400 interest a year and deducts it in his accounts. His mother, a basic rate taxpayer, declares £1,400 savings income; her £1,000 personal savings allowance covers most of it, leaving £400 taxed at 20%, or £80.
The lender’s tax
Interest is taxable as savings income. The starting rate for savings (up to £5,000) and the personal savings allowance (£1,000 for basic rate, £500 for higher rate, nil for additional rate) may cover it. Savings rates rise by 2 percentage points from April 2027.
Common mistakes
- No written agreement
- Using the money partly for personal spending
- Above-market interest rates
- Lender not declaring the interest
- Company not deducting tax and filing CT61
Records to keep
Keep the loan agreement, bank transfers showing the loan and interest payments, and records of how the money was spent.
Frequently asked questions
Can I pay interest to my spouse?
Yes, on the same commercial basis.
Does an interest-free loan get any relief?
No, as no interest is paid.
Can I backdate interest?
Only if there’s a written agreement that set it.
What about a director’s loan to their company?
The company can deduct interest it pays the director, subject to the same rules.
Working out a commercial rate
Look at what banks charge similar businesses for unsecured loans of similar length. Keep a note of the rates you checked when the loan was agreed.
Related: director’s loans, tax on savings interest and cheap loans for employees.
Talk to Accotax
Want this handled for you? Our team at Accotax can help with family loan interest advice. See our small business accountants service, or contact us for a free, no-obligation quote.
This page is general guidance based on HMRC rules for the 2026/27 tax year, checked against gov.uk on 16 October 2026. It is not personal advice, so speak to an accountant about your own situation.
