Income tax liability on loan interest

LumpyCustard_2

My mother is lending me a sum to clear my mortgage. I will be paying her back at a certain rate of interest which ideally would be less than my current mortgage provider is charging, but more than her savings accounts earn, so we both win.

She is a basic-rate tax payer. Can anyone tell me whether she will be liable for income tax on the interest I pay her? (Or could I pay her no interest as such, and a one-off gift at the end of the loan to get around this?)

System

Technically I think she would have to declare the interest but I'm bumping this up hoping Clapton or Fengirl can help you with this.

BoGoF

She would be liable for tax on any interest you paid her - it's treated no differently from any other interest received.

ceeforcat

BOGOF is right regarding the interest. However, why don't you formalise the money your mum gives you as an interest free loan? This will get round the IHT problem in the unfortunate event that your mum does not live for seven years. The repayment of the loan will be just that. Any monies you pay on top of the repayment could be deemed to be a 'gift'. Remember anyone can give away £3000 per annum without IHT complications (plus an additional £3000 if you did not do that the previous year)

So, for example, your mum lends you £50000. Formalise this as an interest free loan. Pay her back £60000, £50000 of which is repayment and £10000 a gift. £3000 (or £6000) is exempt and the remaining £4000 counts towards your estate should you leave us within seven years.

ceeforcat

Further to my earlier post, I should emphasise that, while the money remains outstanding to your mum, it will count towards her estate for inheritance tax purposes. The main point to my post was to attempt to avoid tax being paid on the interest she receives on the assumption that she is still alive when you come to repay the money.

LumpyCustard_2

ceeforcat wrote: »

BOGOF is right regarding the interest. However, why don't you formalise the money your mum gives you as an interest free loan? This will get round the IHT problem in the unfortunate event that your mum does not live for seven years. The repayment of the loan will be just that. Any monies you pay on top of the repayment could be deemed to be a 'gift'. Remember anyone can give away £3000 per annum without IHT complications (plus an additional £3000 if you did not do that the previous year)

So, for example, your mum lends you £50000. Formalise this as an interest free loan. Pay her back £60000, £50000 of which is repayment and £10000 a gift. £3000 (or £6000) is exempt and the remaining £4000 counts towards your estate should you leave us within seven years.

Actually, this is similar to how we've done it before - she lent me 3.5K for part of my house deposit 10 years ago, and after repaying the capital, I just gave her another month's payment to cover what she might have made in the building society during the time of the loan.

The capital will be less than 20K and I'm intending to repay it over about 18 months, so the "interest" incurred would end up being less than 1K, so well within the gift limit.

I agree "formalising" it would be a good idea though, in case the IR want to see evidence. Does that just mean that we put down on paper what we are going to do, sign it, or does it need a solicitor?

Thanks for your help