Loan to Sole Trader

[Blarney]

I am looking at giving a sole trader a loan of 4k which he will repay to me plus interest. Is this legal or would it be seeing as moneylending as I dont want to be doing anything illegal?

Assuming its not illegal, what documentation would I need in place and what rate of interest can I look for or is that totally by agreement? How do I pay tax on the interest and at what rate?

Also what sucurity would be best to have in place. He had offered me a personal guarantee from his father in law but I would think that would be a messy route to be pursuing should he default on payment for any reason.

Any advice or comments welcome.
Thanks blarney

 

[Brendan Burgess]

In theory, you need a money lender's license to lend money.

In practice, if you are giving a friend a loan, there is absolutely no problem.

You have to declare the interest as income and pay your marginal rate of tax on it.

The interest rate would be by agreement. If it's a friend, you might be better off giving it interest-free to avoid any messing with tax or other issues.

For a loan of that amount, a simple document would suffice - it should be signed by both of you and outline that it is a loan and not a gift, the rate of interest , the repayment schedule etc.

I don't really think you can have much security for a loan of this amount. Has he any valuable asset e.g. jewellery or a valuable painting. The security won't really matter as it would cost you too much to enforce it. If he refuses to pay the loan, it would not be worth your while taking legal action against him to recover it.