Should a family member loan or gift cash?

This is a common question. Frequently family members look to loan or gift cash to another family member. It's important to ascertain on what basis the cash is transferred. The law would usually assume the transfer was a gift unless there was some evidence to support the fact it's a loan. For tax purposes the distinction is crucial. You can forget capital gains tax as a simple transfer of cash would be exempt from capital gains tax. The only taxes to consider are Income Tax and Inheritance Tax (IHT). If it was structured as a gift there is no income tax charge. The only issue would be IHT. On the basis that the giftors estate exceeds the available nil rate band the the gift of cash would be a PET. As such if he didn't survive for seven years from the date of the gift the cash would remain within his estate and be subject to IHT at 40%. After 7 years the gift would drop out of his estate for IHT purposes. Note it would need to be a genuine gift. If the giftor still retained an interest in the money it would remain within his estate under the gift with reservation of benefit provisions even after 7 years. If it was structured as a loan, the income tax position would depend on whether the loan was interest bearing or not. If the loan is interest-free, there are no tax implications for either the borrower or lender. In addition there is no requirement to charge any interest and the Revenue would not impute interest in this case. If the loan was interest bearing the interest received would be taxable income for the lender. For inheritance tax purposes any loan (interest bearing or not) would simply be an asset of the lenders estate and be subject to IHT just as if the cash was in the bank. So a simple gift is often preferred. It can be exempt from IHT after 7 years and there is no income tax or CGT implication. Note an alternative is for the giftor/lender to invest directly in the borrower. For example if the cash is to set up a trading company the lender could invest cash in equity in the trading company and potentially qualify for an IHT exemption.