A 'loan/gift' options from a parent (for a car, not a house)

m_k_dons

Hi,

I have a question about my dad loaning me money.

I am buying a car and am taking out a loan for it. He has some spare money that is coming out of a bond and the best rate he can get is 3.something.

So we thought that I may as well pay him the interest I would be giving to the loan provider.

I understand that he should declare interest on loans he has given but when is this due? Is it just due after I have paid him back the amount that he loaned me and am starting to pay him the extra on top of the amount he loaned me?

We want to do it in a way that doesn't need for him to declare income from it ideally.

Would it be better/possible/legal for:

A: Him to gift me the whole amount and then I just gift him an amount each month for however long we decide?

B: Him to loan it to me, I repay him monthly until that amount is repaid. Save up myself the amount of interest agreed and then gift it to him in a lump sum.

I know there are implications of IHT etc but we can deal with them as/if they become applicable really. We have a good relationship and do not want any legal paperwork in the way.

Any advice?

Thanks.

m_k_dons

please note that i don't want to do anything technically illegal really and avoid tax but i just want to know how to word our arrangement which would avoid the need to pay tax.

Rafter

m_k_dons,

You can just gift him the interest. If something was to happen to your dad before the loan is repaid or if the sums involved are big, their could be inheritance tax implications if either of you were to die within 7 years.

Don't think you need a solicitor to draw it up. Just a simple piece of paper you both sign setting out the terms and just to make sure your dad is happy he is signing up for a fixed interest rate for a certain number of years.

You also need to be sure he could afford to lose some of his money if you were to lose your income and the car ends up being worth less than the loan outstanding.

Good luck

R.

m_k_dons

Rafter wrote: »

m_k_dons,

You can just gift him the interest. If something was to happen to your dad before the loan is repaid or if the sums involved are big, their could be inheritance tax implications if either of you were to die within 7 years.

Don't think you need a solicitor to draw it up. Just a simple piece of paper you both sign setting out the terms and just to make sure your dad is happy he is signing up for a fixed interest rate for a certain number of years.

You also need to be sure he could afford to lose some of his money if you were to lose your income and the car ends up being worth less than the loan outstanding.

Good luck

R.

Thank you so much for your answer Rafter.

So just as long as we set out in the terms that I was gifting him an agreed amount because he was kind enough to gift me the initial amount we wouldn't have to declare it as interest?

The amount is £7100.

We just thought that at the moment I may as well pay him the interest I would be giving to another finance company as it will also be more than he can get on savings.

CLAPTON

If you pay him interest then legally he needs to declare this as untaxed income. You can't legally gift him the interest as it's directly related to the loan.

However, I'm sure that for this very modest sum of money, most families would consider such arrangements as private and would not feel the need to complicate the matter by involvong the HMRC.

Rafter

As Clapton says, strictly this is untaxed income and describing it as 'interest' might get the tax office excited if they did ever investigage either of your affairs.

However, if you are clear that you are simply paying your dad back and giving him a gift to say thanks, I don't think anyone could reasonably argue you are breaking the law or avoiding tax.

Good luck

R.