Legality of A's cash in B's high interest acc?

chouxbun

Hi there,

I am wondering if there are any financial legal eagles out there who know the answer to this one. John has a fixed rate offset mortgage of 100K with an interest rate of 6%. He is tied into this mortgage for more than a year from now. He cannot benefit from the current very low interest rates, because of the tie-in. However, he has, in effect, a tax-free savings interest rate of 6%. John has only a few pounds in his offset savings account. If John offered his offset savings account as an attractive place for his friends to put their money for a year, John's friends could earn interest at 6%, and John could make a worthwhile profit not to be sniffed at for his efforts.

I feel there must be something illegal about this? Can anyone advise? Is everyone already doing this?

Thank you!

anselld

Not sure, but I suspect it would be legal so long as the recipient of the 6% declares it as interest income.

tom188

Not really, except John can walk off with all his friends' money, as they will have given it to him and it is up to him what he does with it.

tradetime

Am a bit thick on this one perhaps, but I can't see it as you explain it, if John's friends earn a tax free 6% on their money, how does John

John could make a worthwhile profit not to be sniffed at for his efforts.

anselld

Presumably OP intended "John's friends could earn interest at 6%" to mean 4.8% net ( the equivalent of 6% gross), then John pockets the 1.2%. Don't think the tax man would like it though.

tradetime

Yeah but surely the first 100K simply pays down the interest on the mortgage, I am not really familiar with this product, that's likely why I'm lost here.

dunstonh

There are also IHT implications as well. Also, if the friend dies, the money in the account goes to his beneficiaries.

Its not illegal. You are just gifting the money to someone else who can do with it what they wish. They may comply with your agreement or they may not and on death you could lose the lot.

Primrose

And what happens to the money if John suddenly drops down dead with a heart attack?
No thanks. I like to keep my money where I have control of it. It's bad enough right now trying to put your savings in a safe place hoping the banks won't go bust. I certainly wouldn't add any further uncertainties into the equasion. A friend is no longer a friend once you've "loaned" money to him. It completely changes the relationship.

tonygee_3

ensure that John leaves 'appropriate' amount in his will to friend

SavingSteve

In essence if you have a legal agreement between the two I would think this would work. Though I still wouldn't trust anyone that much!

chouxbun

Thanks to everyone for their comments. It's very interesting to see what people think. I'm particularly interested in the helpful comments about deaths and inheritance. Plus I'm interested that no-one has said that they're doing this already.

tradetime, I'm very sorry, but I am unable to explain the principles of why John would make a profit, and the building society would lose out, though I strongly believe he would make a significant profit. The examples I have worked through in more detail are slightly different from the one I have posed on this thread. I need to look into this a bit more.

Thanks again, everyone, from a newby to the forum. A very nice introduction. (I'll check for any more answers, of course.)