Coates Family Financials and Help

Offering financial loan to a family member is what is referred to as an intra-family loan or a family loan. Unlike personal loans in Singapore, which you would get from peer-to-peer marketplaces or conventional banks, family loans usually are less formal and directly links the borrows to the potential investors.

Furthermore, family financial loans either have simple contracts which as the lender you track the repayments schedule and interest or no contract at all. For the family dynamics, informal family loams make more sense. Nevertheless, a loan should still be considered a contract; thus, both the lender and borrower need to understand its tax consequences.

When to consider a family loan

Family loans usually are not advisable and often tend to be risky. However, if a family member is going through hard times, you might feel obligated to offer your assistance at such times. Before lending the money, you need first to put these particular conditions in place.

How should you make family loans legitimate for tax compliance

Whereas a handshake between two family members being an enforceable loan contract, tax bodies usually assume the transferred money between the family members is a gift. Thus, there needs to exist concrete evidence that the lender intends to impose the repayment terms To ensure this is the case, below are the steps you should take.
  1. Put it in writing
  2. Technically, handshakes are considered enforceable loan contracts. Nevertheless, having the terms of repayment in writing offers you concrete proof that as a lender, you intend to impose the repayments terms of the debt.

  3. Agree on a repayment schedule
  4. The lack of a repayment schedule consequently makes the rules governing the loans complex. So, to avoid backlash between family members for the sake of the family history, a repayment schedule needs to be set. The borrower might decide to either pay the debt monthly or annually.

  5. Keep records
  6. Even after the loan has been issued, the paperwork needs to be maintained. Both the lender and borrower should record whenever a payment is made plus track the loan balance. With remarkable recordkeeping, both family members will have an idea of the loan status.

  7. Charge interest
  8. You should charge interest rest as set by the governing tax body. Typically, the lowest interest varies depending on whether the loan is long-term (more than nine years), mid-term (more than three years but less than nine years) or short-term (three years or less). As a lender, this is necessary to avoid having to pay taxes on the interest you have not earned.