Bank of Mum and Dad

bluewater

My son and his partner have a new baby and are in a 1 bedroom flat that they must leave in March. He is a self employed carpenter with plenty of work. They currently pay £750 per month rent. Needless to say they don't have a deposit. My wife and I are retired have some investments and pensions that we live on. The plan is to lend him £200,000 to buy a house in need of modernisation and for them to pay us £700 per month (effectively interest only). He will do it up and maybe extend using his skills and contacts (and enthusiasm) and probably my help Hopefully when they sell it in a couple of years they will make a gain and do something similar once more.

Presumably we can take a charge on the property to require the loan to be repaid on the sale. And presumably this is a better plan than buying it in our name and renting it to him since we would pay capital gains tax on any gain and income tax on the rent.

Are there any flies in the ointment that I haven't seen?

go_cat

Is this money you have to hand or are you going to have to take out a mortgage ?

What wuld happen if your sons work dried up and he was unable to pay ?

00ec25

bluewater wrote: »

. The plan is to lend him £200,000 to buy a house in need of modernisation and for them to pay us £700 per month (effectively interest only).

presumably this is a better plan than buying it in our name and renting it to him since we would pay capital gains tax on any gain and income tax on the rent.

yes you will avaoid any CGT liabilities however you will have to pay Income Tax on the interest earned from the loan, therefore you will need to evidence in writing what the terms of the loan are otherwise you will have problems with HMRC

are you sure you don't mean an interest free repayment loan instead ?

G_M

Yes, by putting it in his name you avoid income tax and CGT.
Yes, you can put a Charge on the property. See a solicitor.
You should consider/discuss what happens if he defaults on the monthly payments for whatever reason.
Obviously you should consider your own needs - by using your savings/investments in this way you lose access to the capital (I don't know your age - care home costs? / other unexpected major expenses)?
If you need a mortgage to fund this that raises other questions.

bluewater

go_cat wrote: »

Is this money you have to hand or are you going to have to take out a mortgage ?

What wuld happen if your sons work dried up and he was unable to pay ?

Thanks for your replies.

Yes - we have the money on deposit paying us about 4%

It's possible they could default but unlikely I think knowing him and his history. But I'm conscious that meeting payments to us is different to having to pay a bank for instance.

Not sure what you mean by an interest free repayment loan. But the proposed payment is roughly what we would get in interest if the money was on deposit and a bit less than they would otherwise have to pay in rent

mufi

Having been in a similar position, we gifted the deposit and left the offspring to get a mortgage in the normal way. Is this an option, or perhaps just a loan for the deposit?

If he is your only child, your view may be a little different. We have three of the blighters, and could not afford to loan each of them sufficient funds for an entire house:eek:.

RAS

Please also consider what would happen if he and his partner split up; the partner could insist on the equity.

If the child was living there they may well be entitled to continue living in the house until the child finished full time secondary education.

ognum

I have a eew points:

Firstly I believe that you should never lend/give away anything that you cant afford to live without! I do believe in parents helping their children if they have the assets to do so but dont jepodise you relationship with your children by lending to them if you cant afford it

Secondly how do you plan to declare your income of £700 per month to the tax man? Is it income or is it loan repayment/when does it finish/how many instalments?

Also what will you do in the event of your daughter in law having an affair and leaving your son or visa versa How will you protect your investment or can you walk away from it?

Also what happens if you suddenly need the money back?

Just my thoughts!

00ec25

bluewater wrote: »

Yes - we have the money on deposit paying us about 4%
Not sure what you mean by an interest free repayment loan. But the proposed payment is roughly what we would get in interest if the money was on deposit and a bit less than they would otherwise have to pay in rent

OK - so you want (need?) to continue to receive an income from your savings therefore you are not making an outright gift of the cash to your son, instead you are indeed making him a loan.

interest ONLY loan 200,000 at an interest rate of 4.2%pa would be a monthly payment of exactly £700. You would pay income tax on that £700 (so interest rate of 3.4% pa after tax). But as an interest only loan you will never get your £200,000 back unless you put a charge on requiring the 200k to be repaid from the sale of the house if /when he moves out. So you need to cover when you will get your capital back

an interest free repayment loan means no Income Tax is due as there is no interest, the money you get is simply your capital being repaid to you in instalments. Therefore if you want him to pay £700pm, it will take him over 23 years to repay you in full (700 x 285 months = 200,000)

This is why HMRC want to see things written down.

Clearly if you want to have an income as well as getting him to repay your capital (ie an interest paying repayment loan - aka "mortgage") then the period of the loan will be different as will the interest rate. The £700pm is a mix of (taxable) interest and (non taxable) capital where the interest is charged on the balance outstanding each month so the proportion of capital repayment you get each month will be increase over time as he pays off the balance. For example if you charge hiom 4% interest but make the monthly payment £700 then in month one he will pay £666.66 in interest and repay £33.33 of capital . It will take him 26.5 years (317 months) to repay your 200,000 and in that time you will get approx £21,000 in interest.

As others have said if you expect to get your 200,000 back then you need to cover what happens if they split or he stops paying. Assuming he does not have a mortgage from anyone else then it will be easy (via a solicitor) to take a charge on the property.

Also you need to consider what will happen to the balance of the loan when you (or he) die before his house is sold.

smcqis

Hes a grown man, then him get a mortgage like the rest of the world if he doesnt want to rent

dimbo61

Have a look at an offset mortgage with YBS !!!
If you "gift" your son a 25% deposit which is £50K and he can get a £150K mortgage with YBS you can then put the other £150K into an offset account in your name which you can dip into when you need too and if not needed it will save him interest on his mortgage payment.
if your son and his partner break up then you can take "your" money out of "your" offset account.
Its called family and friends
With the 25% deposit you can have an interest only mortgage