Since quite a few tax traps and legal pitfalls can arise when a loan agreement doesn't work out, parents should carefully consider the implications of lending money to their children before doing so.
Proper documentation of a loan, including a mortgage over the property, can avoid many complications. For example, if the child receiving the loan was to divorce from their partner, a written document identifying who handles the repayments can prevent the former partner from refusing to share the responsibility of the repayment.
For tax purposes, parents should also include a repayment schedule, repayment records and a plan that determines how the loan will be repaid as scheduled. If applicable, parents should also include proof that the child was credit-worthy when the loan was originally made.
Lending money to your children may have certain tax consequences for you as a parent, so it is also important to weigh up the likelihood of your child's follow-through. Parents need to think carefully before lending money for a risky venture unless they are prepared to part with it as a gift with possible tax consequences. It may also be beneficial for parents to consider seeking professional or legal advice before committing to the loan.