Tax Free loans to students

AntiGordon

I'm currently in the unhappy position of paying tax at the top whack on my savings. I have never felt comfortable with having to surrender 40% of any interest earned to Gordon. Not exactly an incentive to save!
Is it legal for me to give my nephew, who has no income as a student, a loan so that he can benefit from tax free interest?
The loan would have no strings attached and I would just expect my capital back, say in 3 years' time.

dunstonh

I'm currently in the unhappy position of paying tax at the top whack on my savings. I have never felt comfortable with having to surrender 40% of any interest earned to Gordon. Not exactly an incentive to save!
Is it legal for me to give my nephew, who has no income as a student, a loan so that he can benefit from tax free interest?
The loan would have no strings attached and I would just expect my capital back, say in 3 years' time.

I assume you have considered ISAs, Pensions low yielf OEICS/UTs and Bonds as savings/investments to reduce your tax liability?

You can gift money so no problem there. There would be a potential IHT liability if you were to die in that time (assuming amount is over the gift allowance). You would probably want a solicitor to draw up an agreement which would be a small cost.

dag_2

You can gift money so no problem there. There would be a potential IHT liability if you were to die in that time (assuming amount is over the gift allowance).

True - but if you try to formalise your expectation of getting the money back three years later, it's no longer a gift.

If I was your nephew, I might be tempted to skip the country upon graduation. But let's say you trust your nephew to give the money back. Don't forget, the inheritance tax liability works the other way round too. If he dies within seven years of giving the money back to you, then there will be a liability for inheritance tax.

Remember that students are subject to the same income tax allowances and rates as everyone else. Grants, bursaries and student loan advances are not taxable - and employers usually don't deduct tax from full time students because their earnings are usually lower than their allowances. Student unions push R85 awareness for much the same reason. But I think you knew that already.

AntiGordon

Thanks for that.
Trust is not really an issue.
I just wondered if anyone else had tried this.
It just seems too easy, almost a husband and wife affair, pass assets to someone else to avoid paying tax. I wondered if the Revenue would take too kindly to the beneficial owner of the assets (me) deliberately avoiding paying tax by passing the assets to a non taxpayer.
If I 'gift' the money for 3 years and then it is 'gifted' back to me (ignoring the inheritance tax problem) I wonder if the Revenue might see this as just a contrivance to avoid paying it its (un)fair share of any interest.
Anyone done this or know of any precedents?

Robert_Sterling_3

I think you know the answer to this question.

You cannot lend your money to your nephew so that there is no tax to pay on the interest and then get your money back a few years later.

The law says that where a series of financial transactions are each ok in themselves if overall the purpose of the transactions is such that tax is evaded then the series of transactions is itself illegal.

You can of course give him YOUR money but you would like to give him Gordon Brown's money.

System

Can someone tell me how the Inland Revenue would find out that you have given your nephew an interest free loan out of your savings? How would they know that you haven't just spent the money?

isasmurf

I would think it would depend on the amounts involved. If a large amount of income from interest disappeared then reappeared a few years later, it could arouse the suspiciousions of the taxman. They would open an enquiry and I think I am correct in saying it is up to the individual to prove they did nothing wrong, rather than for the Revenue to prove you did do something wrong.

Robert_Sterling_3

How would they know that you haven't just spent the money?

It is not, I hope, the policy of MSE to encourage crime such as fraud.

AntiGordon

There is no question of not trying to stay on the right side of the Revenue.
I can see that I can be deemed to be avoiding tax but it looks like a perfectly legal way of doing it. People give relatives or friends interest free loans to buy houses, start businesses etc. This seems to be a very tax efficient way of helping my student nephew. If I was getting an interest kickback from my nephew then that would definitely have been dodgy!