mortgage deposit problem

in_the_shed.

hi a family friend is willing to lend us a large sum of money towards the deposit to help us buy a house.
now before you jump in and say that the mortgage lender wont like this... let me go into a bit more detail.

the place we want to buy has a large plot of land that we would like to sell some of..

the family friend is happy to wait until the land is sold to have their money back..

now the problem...

the mortgage lender needs a gift letter our problem is that if we give them a "gift" letter then we "could" become taxable on the money.
the mortgage lender knows the full situation and is ok with us returning the money to our family friend when we sell the land.

but they still need a simple gift letter.

if we have a signed and witnessed contract between us and our family friend stating that we will repay the loan from them once we sell the land.
would that contract keep the tax man from trying to take lots of money from us.

the simple facts are.
..the deposit is a loan (we do have some deposit ourselves) but no monthly payments.
..the lender wants a "gift" letter but knows we will have to pay a chunk of money to our friend once we sell the land.

opinions4u

There is no tax for you to pay on a gift. The estate of the person making the gift may be liable for IHT if they die within seven years, but that is not your liability.

the place we want to buy has a large plot of land that we would like to sell some of..

the family friend is happy to wait until the land is sold to have their money back..

You will need the lender to agree to release of part security prior to the sale. They may charge a fee for this. If your LTV is high they may decline.

if we have a signed and witnessed contract between us and our family friend stating that we will repay the loan from them once we sell the land.
would that contract keep the tax man from trying to take lots of money from us.

It makes no difference to the taxman. It would mean that if your friend died at any stage his executors would ask for the loan to e repaid to his estate.

Thrugelmir

in_the_shed. wrote: »

the simple facts are.
..the deposit is a loan (we do have some deposit ourselves) but no monthly payments.
..the lender wants a "gift" letter but knows we will have to pay a chunk of money to our friend once we sell the land.

The lender requires a "gift" letter in order to protect it's own interests.
Whether you subsequently sell a piece of land at a later date is a totally different issue. Which has no bearing on the purchase transaction.

holly_hobby

Your friend needs to be aware that the "gift" letter, essentially states the contribution by them is a gift without reservation, condition or beneficial interest - which simply means that your friend has no possessionary claim on the monies, land/property, and if the lender ends up seeking a possession order on the property/land, he will lose his capital injection.

Is your friend aware of the implications of the signing of the gift disclaimer ? If not, you may find out that they wish to withdrawn knowing the legal implications of citing the donation for mge purposes as an unconditional gift (which it clearly isn't).

I am amazed to be honest that the lender is allowing this, however the signing of the gift disclaimer does rather put the ball in their court, and removes any legal claim your friend may consider on the said monies.

Sorry, I know this won't be what you want to hear ... but nevertheless very important that all parties understand the ramifications of what this exercise will amount to.

Tax wise - as stated no tax on the receipient of a loan (as I am sure it will be noted by his solicitor for the purpose of tax and his estate) or indeed a gift (notwithstanding PET regs and if the estate hasn't sufficient capital to pay IHT due on Donors death, whilst the PET is unexpired, which may result in your exposure, which can be provided for by the effecting of a specalist 7 yr term insurance policy, which is specifically used in PET estate planning).

If going the loan route, the creditor (as your friend essentially will be), is liable to tax upon any gain or consideration (in this case the value of the piece of land) received in exchange for the donation.

SDLT may be due by him on any subsequent receipt of land.

The later sale or transfer of part of the land to him, will also be subject to the lenders agreement (as their advance will be secured on the whole site and any reduction of land may well affect their security - so they may well refuse), and if the sale/transfer is permitted by the lender, the subsequent splitting of title deeds and re-definition of dwellling boundarys via Land Reg and re-drawing of title deeds.

It may well be an idea for your friend to also see if the land to be transferred, would achieve planning permission (which I guess is the object of his involvement in the excercise), as if PP is unlikely to be given, he will be left with simply a piece of land and not much else - with onward sale a bit of an issue for him.

So its going to be a messy one ....

Hope this helps

Holly

PS - PET = Potentially Exempt Transfer