Cutting out the middle man

furndire

My dsil has offered to lend us the money we need to build a couple of buy to lets, (we already have the land). She wants to lend us the money because she is on her own, and no family, so everything will end up eventually in a common pot for our kids. Obviously we want to be fair, and just cut out the middle man, i.e. mortgage company.
Question is what would be a fair interest rate to pay her - difference between what she would get, and what we would have to pay on BTL Mortgage. So what interest would she have achieved on say a very safe investment of £100,000 taking into account that tax would be paid on interest.

UK007BullDog

Check out online BTL mortgages. Take the 5 highest and lowest rates (full status, not self cert), 2 yr fixed or standard variable rate from some high street lenders. Then add them all up and divide by 10.

You will probably come to a rate of around 5%.

More important though is to get it all written down by a legal eagle to protect all in the future in case your plans go belly up or you make lots of profit.

Good luck and lucky yous!

furndire

That's sort of around the figure we were thinking as well. Luckily things would have to be really really desparate to go belly up - all angles are covered. But we want to get things drawn up properly. We are lucky that we are a close sensible no-nonsense family, not in each others pockets, but there when needed.

rossbenn

furndire wrote:

My dsil has offered to lend us the money we need to build a couple of buy to lets, (we already have the land). She wants to lend us the money because she is on her own, and no family, so everything will end up eventually in a common pot for our kids. Obviously we want to be fair, and just cut out the middle man, i.e. mortgage company.
Question is what would be a fair interest rate to pay her - difference between what she would get, and what we would have to pay on BTL Mortgage. So what interest would she have achieved on say a very safe investment of £100,000 taking into account that tax would be paid on interest.

If she dies you will have to remortgage to pay back the debt to her estate. This in turn could have IHT problems because the money would not be in a trust. The revenue might also see it as a gift with reservation. They dont like that.
If you are paying her interest this would also count as income for her and be taxible.
So what to do? She could invest the£100,000 into an investment bond writing the bond in trust to you and your wife which takes it out of her estate after seven years for IHT purposes. She then takes 5% p.a. out of the bond payable monthly to her and if the £5000 income per year does not take her into a higher rate tax band she should have no tax to pay on the income. So, she then gifts the £5000 to you and your wife every year or monthly (split) between you. You take out a interest only BTL mortgage for the £100k and use the £5k to pay the interest. You can claim tax relief on all the interest, among other things. At the end of day when the donor dies you inherit the £100k from the trust without any IHT to pay.

You also insure the mortgage so that if you or your wife die the insurance co pay off the mortgage and you still have the £100k to come tax free.
Tax savings all round and not to complicated.

furndire

Oh dear, sounds complicated - (I thought it might in the end)

(She could invest the£100,000 into an investment bond writing the bond in trust to you and your wife which takes it out of her estate after seven years for IHT purposes)

Doesn't that mean we can't use the money to build?

rossbenn

Yes you can, but what you do is take out the mortgage on an interest only basis for the £100k.
She gifts you the income from the bond on a monthly basis and you in turn pay the mortgage.
When she dies you get the £100k tax free ( if she lives for seven years )which she invested in trust for you. And you then pay off the lender.
If you or your wife died in the interim your mortgage protection policy would pay off the mortgage.
So the survivor would have the house paid and the £100k in trust still to come in the future which if invested would also provide an income for the surviving spouse. It is not that complicated, it is about trying to save tax.