Financing from friends and family: tax implications
Understand the tax implications of investment and interest-bearing borrowing from friends and family.
Some loans are interest-bearing while some are interest-free.
Interest-bearing loans - even those with low rates - have tax implications for you and the lender:
- you may deduct loan interest on business loans from your taxable profit
- the lender must declare interest received as taxable income
However, if the loan is interest-free, there are no tax implications for either borrower or lender.
It is good practice to set out the loan's interest and repayment terms in a written agreement. Both sides should keep records of all repayments.
If you have sold shares in your business to a friend or a family member and you make dividend payments to them, keep full records. You may not deduct such payments from your business' taxable profits, but the recipient must declare them as taxable income in the year they receive the money. See company shares and shareholders.
for advice on the tax implications of financing from friends and relatives.