Private mortgage?

System

chewmylegoff wrote: »

Personally, if I was doing this, I wouldn't structure it so that your dad receives taxable rental income or a taxable capital gain.

Would the £700 be income taxed? Even if it was debt repayment?

paddyrg

Joeskeppi wrote: »

I got that figure £700 x 12months x 8 years = £67200, minus the 20k "capital" I pay off.

Gah! Just reworked my sums - 48k would be based on 48% being 5% compounded for 8 years! Ie I did my sums based on £100k, not £170k++

As such it is just under 3% and a pretty woeful deal for him financially even at current rates - however as I said this isn't about the money. If you wanted to be 'fair', I don't think your repayments would even actually cover the interest if he had to borrow to buy the place in the first place, so 'fair' would be to pay more like £170k in 8 years and treat the interim as rent.

Are there other siblings who are getting similar benefit? If there are, but who are not getting this kind of benefit it could end up messy, so be absolutely clear with everyone!

System

paddyrg wrote: »

Gah! Just reworked my sums - 48k would be based on 48% being 5% compounded for 8 years! Ie I did my sums based on £100k, not £170k++

As such it is just under 3% and a pretty woeful deal for him financially even at current rates - however as I said this isn't about the money. If you wanted to be 'fair', I don't think your repayments would even actually cover the interest if he had to borrow to buy the place in the first place, so 'fair' would be to pay more like £170k in 8 years and treat the interim as rent.

Are there other siblings who are getting similar benefit? If there are, but who are not getting this kind of benefit it could end up messy, so be absolutely clear with everyone!

He doesn't need to borrow anything, it's sitting in his account at the mo but I don't know what he gets on it. No other siblings to worry about, my brother rode the HPI wave in the early 2000s and my sister is 6... yes our family is odd

chewmylegoff

Joeskeppi wrote: »

Would the £700 be income taxed? Even if it was debt repayment?

I think there is a risk that it would be as the substance of the agreement would be that you were paying rent to your dad even if you dressed it up as him lending you £170k and you making repayments, you are still receiving the benefit of the asset.

An option is for him to buy the house, then gift it to you so it is in your name, then in 8 years time you mortgage the property and gift him £45k or whatever return you agree. That is how I would do it and I don't think the taxman could touch that arrangement- obviously if your dad needs the income in the meantime this doesn't really work.

The arrangement would also depend on your honesty!

jgh

That's how most of my family bought property in the 19th and the first half of the 20th century, mind you that was typically "£150 down, £50 a year for 5 years". Anyway, there are solid precedents for it and a good lawyer/accountant/whatever will be able to draw up a proper agreement that properly balances both side's rights and duties.

wotsthat

Joeskeppi wrote: »

My Dad mentioned giving me a mortgage. Is there a word for that?

Can you bods see if my sums work.

Purchase price £170,000, he buys it outright for cash.

I pay him £700 a month for 8 years.

After 8 years, I buy it back for £150,000.

I think this means my Dad makes a £47,200 profit over 8 years. Is this a good return?

Benefit for me is I get to keep my £24k deposit I;ve saved so far to start a family with and have cheaper repayments.

What have I missed? Be nice These numbers are fairly random, I just took an initial guess.

If your dad put the £170k in the bank he'd need a return of 5% (tax free) to pull in £700/ month interest so he's not losing out on this deal.

For you to get the same deal from a mortgage lender you'd need a 100% IO mortgage fixed at 5% for 8 years so you're getting a good deal too.

He needs to declare the income as it's taxable but the deal between you two can be done on trust. I'd just make sure that the ins and outs were discussed in advanced - what does he want to happen if he dies? Do you repay your brother and sister instead etc.

If he doesn't need the cash he could just gift you the money and amend his will to show you've had an 'advance' payment.

I like the sound of your dad by the way!

LydiaJ

JonnyBravo wrote: »

Absolutely gen.
Of course it could be done differently Joe, ie your dad will give you the money, ie the mortgage, and you will purchase it and own it.
Of course as RM says your dad may want a charge on the property.

This all depends on how "legally watertight" you want it. I have no idea of how complex this is to arrange.

Of course it can be done if trust is 100%.
I used to have a "mortgage" with my dad for 4ish years. He lent me some money. I paid him a rate higher than he was getting on deposit and I got a rate slightly lower than the mortgage I would have had at the time.
This was done entirely on trust and with the agreement that if anything happened to me my wife would continue to pay. (Of course it is entirely possible my dad may have not collected then but that would have been his decision and risk)
All done on "word" only. No charge on the property etc. I have no idea what his accountant declared for tax.
It all depends on how much you trust your dad to not need the money early (or what you'll do if he does) and how much he trusts you to pay no matter what (or what you've agreed to do if you can't pay).
As it is I repaid early just before my 40th b'day!

As for is it a good return? Well, I'm with paddy. It depends on what his goal is IMO.

I have a private mortgage like that with my dad. It's a loan, on trust. He handed over the money and I bought the house outright in my own name. I pay him monthly, and keep a spreadsheet that calculates the interest (compounded monthly) and send him a statement at the end of the tax year so he knows how much interest to declare on his tax return. The capital repayment part of what I pay isn't taxable. (One of his conditions for setting up the arrangement was that I should do all the calculations and keep all the records!)

Unlike your dad, mine is already retired. He has plenty of money, and doesn't expect to need a lump sum back any time in the future. So we have no plan for me to buy the rest off him in a few years. Either I'll carry on paying until I've paid it off, or else whatever I still owe will count as part of my share of his estate. (This possibility is likely unless I get more money from somewhere. I'm a single parent and work part time, so I can't afford to pay him back very quickly, so at the current rate it'll take me ~20 years to pay off, and he's 85 now.) If he needed the money for some unforeseen reason, I would mortgage the house and pay him back. The loan is nowhere near the value of the house - I had quite a lot of cash of my own to put down too.

We haven't actually discussed what would happen if I died, but all my assets would go to my kids, with my brothers as trustees and executors, and one brother is a probate solicitor and would sort it out somehow.

If interest rates go up it will probably not even occur to him that what I'm paying him is no longer a good return. He's not stupid, but he's old and he's never acquired the mindset for the whole "ditch and switch" thing that Martin goes on about. But I would notice about the interest rate and I would discuss with him how much to put my interest rate up by.

Joeskeppi wrote: »

Would the £700 be income taxed? Even if it was debt repayment?

You would need to work out what the £700 was. Is it rent, or interest, or capital repayment, or bits of each? They'd be taxed differently depending.

chewmylegoff wrote: »

I think there is a risk that it would be as the substance of the agreement would be that you were paying rent to your dad even if you dressed it up as him lending you £170k and you making repayments, you are still receiving the benefit of the asset.

An option is for him to buy the house, then gift it to you so it is in your name, then in 8 years time you mortgage the property and gift him £45k or whatever return you agree. That is how I would do it and I don't think the taxman could touch that arrangement- obviously if your dad needs the income in the meantime this doesn't really work.

The arrangement would also depend on your honesty!

Are you sure about the taxman? The gift of the house to the OP might get through, but wouldn't the "gift" of £45k back to the dad be regarded as factitious and come under scrutiny? I'm no expert, but I do know that the property negotiations between my cousin and my parents involved various suggestions on her part of ways to get round tax etc by defining things as "gifts" and my solicitor brother kept having to explain that sadly her ideas weren't legal. Although chewy, detecting fraud is what you do for a living, isn't it? So perhaps I'm teaching my grandmother to suck eggs the wrong way round. I would advise the OP to get legal advice before setting up a reciprocal gift scheme like that, though.

chewmylegoff

LydiaJ wrote: »

I have a private mortgage like that with my dad. It's a loan, on trust. He handed over the money and I bought the house outright in my own name. I pay him monthly, and keep a spreadsheet that calculates the interest (compounded monthly) and send him a statement at the end of the tax year so he knows how much interest to declare on his tax return. The capital repayment part of what I pay isn't taxable. (One of his conditions for setting up the arrangement was that I should do all the calculations and keep all the records!)

Unlike your dad, mine is already retired. He has plenty of money, and doesn't expect to need a lump sum back any time in the future. So we have no plan for me to buy the rest off him in a few years. Either I'll carry on paying until I've paid it off, or else whatever I still owe will count as part of my share of his estate. (This possibility is likely unless I get more money from somewhere. I'm a single parent and work part time, so I can't afford to pay him back very quickly, so at the current rate it'll take me ~20 years to pay off, and he's 85 now.) If he needed the money for some unforeseen reason, I would mortgage the house and pay him back. The loan is nowhere near the value of the house - I had quite a lot of cash of my own to put down too.

We haven't actually discussed what would happen if I died, but all my assets would go to my kids, with my brothers as trustees and executors, and one brother is a probate solicitor and would sort it out somehow.

If interest rates go up it will probably not even occur to him that what I'm paying him is no longer a good return. He's not stupid, but he's old and he's never acquired the mindset for the whole "ditch and switch" thing that Martin goes on about. But I would notice about the interest rate and I would discuss with him how much to put my interest rate up by.



You would need to work out what the £700 was. Is it rent, or interest, or capital repayment, or bits of each? They'd be taxed differently depending.



Are you sure about the taxman? The gift of the house to the OP might get through, but wouldn't the "gift" of £45k back to the dad be regarded as factitious and come under scrutiny? I'm no expert, but I do know that the property negotiations between my cousin and my parents involved various suggestions on her part of ways to get round tax etc by defining things as "gifts" and my solicitor brother kept having to explain that sadly her ideas weren't legal. Although chewy, detecting fraud is what you do for a living, isn't it? So perhaps I'm teaching my grandmother to suck eggs the wrong way round. I would advise the OP to get legal advice before setting up a reciprocal gift scheme like that, though.

I think it would be ok, as long as there are no written agreements in place which obligate the repayment, but you are right, legal advice (for both parties) is necessary before you engage in any transaction of this value.

LydiaJ

chewmylegoff wrote: »

I think it would be ok, as long as there are no written agreements in place which obligate the repayment, but you are right, legal advice (for both parties) is necessary before you engage in any transaction of this value.

So are you saying that it would be tax evasion, but as long as you had nothing in writing then nobody would be able to prove it, so you'd get away with it?

chewmylegoff

LydiaJ wrote: »

So are you saying that it would be tax evasion, but as long as you had nothing in writing then nobody would be able to prove it, so you'd get away with it?

I'm saying it would be a genuine gift, because there are no obligations tied to the gift of the house or the money to buy it and joeskeppi can just decide in 8 years time or whatever to give his dad some money. That said, HMRC may not agree with me.