'Mortgage' from my brother & tax implications.

SilverSix

Hi guys,

Apologies if this is the wrong section.

I'll give you the brief run down before I get started: (sorry for the lengthy post!)

My father passed away about a year and a half ago and left us (my brother(23) and I (21) £150,000 each from his estate (sale of house & pensions). We later discovered another £200,000 roughly in a trust he had left to him by his father which will now come down to us (£100,000 each). So in total we have £250,000 each.

I invested about a third of that which is up a little bit since investing a short while ago. And the rest was still tied up in his house and also the trust which I am now a named trustee of and the other is my uncle and another family friend I believe.

I decided a few months ago to buy a house and then rent out the rooms to friends/lodgers to help overpay the mortgage. I've paid my plot reservation fee £2000 with a 5% deposit to pay in mid March and the rest to pay upon completion of the build in October/November this year. ( I spent a lot of time working out budgeting etc, income/estimated out going etc to check this would all work and was affordable)

The price of the property which is a 4 bed link detached I got down from £275,000 to £260,000 + my stamp duty paid + £1000 towards my legal fees. I have £7000 worth of upgrades planned (as they come bare and standard).

My salary now is £22,000 pa. I was/am going to take a £40,000 mortgage and use £10,000 to bridge the gap between my capital and the purchase price and use the remaining £30,000 for upgrades, to furnish the house and also buy a few extra pieces of equipment for my home gym. Anything I didn't use or spend I would overpay asap (up to the allowance before charges).

I was speaking to my brother last night and he has said that he would be happy to loan me the money on the basis I repay him as I would the mortgage at a slightly cheaper rate between 3.5 and 4%. I was looking at a 4.5% fixed for 5 years from my building society (Fixed for security/peace of mind and also so my lodgers rent doesn't shoot up should the base rate rise).

Now I'm all for having a mortgage from my brother it gives me a bit of flexibility in that as he isn't relying on the money should I find myself in a spot of bother with finances I can take some grace periods providing I make up for any behind payments. It also means my monthly payments would be slightly less and he makes a bit of cash out of it too.

With one lodger and overpaying him £300 per month the mortgage is clear in 7 years and he makes almost £6500. With two lodgersand overpaying £600 it'd be clear in 4 years and he'd make just over £3500 and finally with 3 lodgers overpaying him £900 per month it'd be clear in 3 years and he makes £2500. I do have 1 person who is serious about lodging and 2 others who are interested so far. (I am aware of declaring my lodgers rent profits as income, what is taxable and the tax free allowance of £4250 which has all been worked in to my calculations of affordability towards overpaying the mortgage.)

Now the problem we are unsure of is how I would go about repaying him without it being classed as unearned income for him? so that he doesn't have to pay tax on my repayments. So far the only ways that sprung to mind were to have a joint account that I was paying in to and he could then withdrawn from should he wish and I would pay the tax on any interest earned. Or for me to pay into an account in my own name and eventually gift him the money up to the allowance each year or in one lump sum at the end? In order for him to give me the money when I receive the funds from the sale of the house I would receive £40,000 more than him.

Has anybody had any experience with something similar or able to offer any advice?

Thanks in advance

Benny

P.S. If you could refrain from questioning my reasoning for buy a house, using all the money and not investing it elsewhere or buying a property to rent out, or just renting myself I would appreciate it. I spent months weighing up the pro's & cons of each and this is what I have decided to do. So I would appreciate it if you could focus on my question at hand thanks.

Annisele

Your brother will have to pay tax on the *income* he receives from you, but not on the capital repayments. There's nothing you can (legally!) do that makes him somehow not liable for tax on his income.

So - using easy figures - say he lends you £1k for a year at 10% interest. You pay him back a total of £1,100, of which only £100 is taxable. If he's a basic rate taxpayer, then the one year loan arrangement would have cost £20 in tax.

Your brother *might* be happy to give you an interest free loan; no interest would mean no tax. If you later decided to give him a monetary gift, entirely unrelated to the loan, the taxman probably wouldn't care. The problem with that (for your brother) is that he's lost the interest he would have received if he'd left the money in a bank because it's an interest free loan. He certainly can't force you to give him a gift; gifts are voluntary.

SilverSix

Annisele wrote: »

Your brother will have to pay tax on the *income* he receives from you, but not on the capital repayments. There's nothing you can (legally!) do that makes him somehow not liable for tax on his income.

So - using easy figures - say he lends you £1k for a year at 10% interest. You pay him back a total of £1,100, of which only £100 is taxable. If he's a basic rate taxpayer, then the one year loan arrangement would have cost £20 in tax.

Your brother *might* be happy to give you an interest free loan; no interest would mean no tax. If you later decided to give him a monetary gift, entirely unrelated to the loan, the taxman probably wouldn't care. The problem with that (for your brother) is that he's lost the interest he would have received if he'd left the money in a bank because it's an interest free loan. He certainly can't force you to give him a gift; gifts are voluntary.

Thank you for the reply.

So in effect I could borrow the £40,000 interest free. And once the 'loan' has been re-paid gift him the interest? That he would of made on it for the duration it took me to repay it.

Would all this need to be agreed via a solicitor for legal reasons or is it fine to have it as a verbal agreement should we ever be questioned regarding it? We trust each other so don't feel a contract as such is necessary though I'm not opposed to the idea of it.

getmore4less

What are the terms of the trust with £100k in it?

edit:
can you actualy use this money in this way?


If you have more than one lodger you open up CGT as an issue.
The full property no longer gets PPR.
http://www.hmrc.gov.uk/manuals/cgmanual/CG64702.htm

You need to decide if you want to go down the rent a room but you have that on your list

You also need to look at HMO(multiple occupancy) might need a licence.


Inter family borrowing come with inherent falling out risks.

To avoid the tax on the interest income, as has been said interest free loan
Loads of ways to avoid the how to I reward him for the generosity,
A unconected gift is one way but could be an issue is there is one big transaction at some point and HMRC stick their nose in(unlikely).
Buy his shopping every now and then and it will never come up.


One point from you post

also so my lodgers rent doesn't shoot up should the base rate rise

Lodger rents are independant of interest rates or any of your costs, they are market rates.



Another option you might want to look at is the YBS offset plus
http://www.ybs.co.uk/mortgages/types/offset/offset_plus/offsetplus_b.html
http://www.ybs.co.uk/mortgages/types/offset/offset_plus/offsetplus_s.html

You borrow on a mortgage and he offsets so you never actualy get the money off him so no issues paying him back it is always his money.


I would also re-evaluate how much you need, you can gte seccond hand furniture for practicaly nothing these days, the only think you may need new for the lodgers are matresses and linen.

kingstreet

As getmore4less says, it's worth bearing in mind the requirements you'll have to meet for an HMO. These can be done during construction in your case;-

https://www.csduk.com/CSD/Housing/PrivateHousing/Faqshomesinmultipleoccupancy.htm

This is Suffolk County Council's site, but it gives the info you need.

getmore4less

kingstreet wrote: »

As getmore4less says, it's worth bearing in mind the requirements you'll have to meet for an HMO. These can be done during construction in your case;-

https://www.csduk.com/CSD/Housing/PrivateHousing/Faqshomesinmultipleoccupancy.htm

This is Suffolk County Council's site, but it gives the info you need.

AIUI for lodger there is a get out if you go for part time lodger(s) that have other homes, which a typical example would be a Mon-Fri lodger.

The living accommodation is occupied by those persons as their only or main residence, or it is treated as such;

kingstreet

getmore4less wrote: »

AIUI for lodger there is a get out if you go for part time lodger(s) that have other homes, which a typical example would be a Mon-Fri lodger.

The living accommodation is occupied by those persons as their only or main residence, or it is treated as such;

Aye. Worth a mention as the OP hasn't said much about the tenants and he needs to be aware of the requirements - just in case.

Gorgeous_George

Tax evasion is illegal as well as immoral. It is probably less than £300 per year at the most (assuming 20% tax payer) and this will reduce as repayments are made.

I wouldn't risk the wrath of the taxman for such a small sum.

GG

SilverSix

getmore4less wrote: »

What are the terms of the trust with £100k in it?

edit:
can you actualy use this money in this way?

I don't happen to have the terms of the trust to hand however I do know that I can withdrawn from/end the trust should I wish. This would take some time so I will be sure to give plenty of notice before I need the funds.

I'm also going to be withdrawing my allowance of £10,100 from it this year, hopefully in the next few following weeks (which I am in the process of) so as to reduce the amount of CGTax I'm subject to.

One point from you post

also so my lodgers rent doesn't shoot up should the base rate rise

Lodger rents are independant of interest rates or any of your costs, they are market rates.

What I meant was that in order for me to continue overpaying the mortgage by a specific amount each month. Should the base rate rise and I be on a tracker mortgage, more of the profit from each lodgers rent will have to go towards interest/capital repayments as opposed to overpayment. Let me know if that's not very clear!

I was unaware of the HMO.

I've found this:
http://www.direct.gov.uk/en/HomeAndCommunity/Privaterenting/Repairsandstandards/DG_189200

Which states it needs to be at least 3 tenants. In all likelihood it would probably be two.

Does an HMO need a licence?

An HMO must have a licence if they are:

• of three or more storeys
• occupied by five or more persons who form more than one household

A page from the local council:

http://www.aylesburyvaledc.gov.uk/housing/housing-services/private-sector-housing/fair-rents-inspection-for-home-in-multiple-occupat/

Which mentions 'where the landlord is not resident'. I will be so am unsure how this will affect me.

getmore4less

I'm also going to be withdrawing my allowance of £10,100 from it this year, hopefully in the next few following weeks (which I am in the process of) so as to reduce the amount of CGTax I'm subject to.


Trusts get taxed differently from real people and don't get a full CGT allowance are you getting proper advice on this?

getmore4less

Aylesbury HMO this might be a better link

http://www.aylesburyvaledc.gov.uk/housing/housing-services/private-sector-housing/houses-multiple-occupation/

look at the bottom link

Think parking if you want 3 people in the house

Most of the new build in Aylesbury has sub standard parking,

Fairford Leys was designed with NO sensible parking have a drive round there when every one is home to see what a crap place it is for multiple accupancy homes with mutliple cars.

Which new estate are you buying on?