Tax implications of paying back a loan from parents.

Edtough

Hi guys, hope you can help?

My parents are lending me a large sum of money for a house purchase. I will be paying this back in instalments; will these repayments be subject to income tax for my parents?

Thanks in advance.

xylophone

Is the loan interest free?

LittleVoice

Edtough wrote: »

Hi guys, hope you can help?

My parents are lending me a large sum of money for a house purchase. I will be paying this back in instalments; will these repayments be subject to income tax for my parents?

Thanks in advance.

As long as you are repaying the capital sum only and not paying them interest, then it is just their money going back to them. No tax due.

Edtough

Ok it gets a little more complicated; my parents are taking out an interest only mortgage on their house in order to come up with the money to lend me. I would be covering the interest on the mortgage on my parents' house by paying them the value of their interest payment each month.

On top of this I would be making lump sum repayments of the actual capital to my parents.

So effectively my parents are not charging me interest on the loan, but I am indirectly paying the interest they will encur on this 'interest only mortgage' on their house.

xylophone

I would be covering the interest on the mortgage on my parents' house by paying them the value of their interest payment each month.

In this situation I would contact HMRC to find out whether they would regard this as interest charged by your parents and therefore taxable as income in their hands.

anselld

Arguably, if the the income was taxable then the cost would be tax deductible, ie profit is nil. It would seem unfair if any tax was due under the circumstances.

jimmo

anselld wrote: »

Arguably, if the the income was taxable then the cost would be tax deductible, ie profit is nil. It would seem unfair if any tax was due under the circumstances.

That, sadly is not the case.

Going back to the days when I first became a taxman everybody could claim tax relief on any interest they paid and your argument would have been justified..

Then the rules changed so that whilst businesses could continue to claim for business loans, individuals could only claim for home purchase or home improvement loans.

From memory, that was in the 70s but, it became fairly common knowledge that there were an amazing number of people who were driving around town and further in their new kitchens, bathrooms or double glazing.

Nowadays people in business can still claim interest relief on business loans but the rest of us can claim nothing.

As I understand it, non tax rules make it pretty much impossible that the OP’s parents could go into business as money lenders and it is therefore impossible for them to claim a deduction for the interest they pay.

John_Pierpoint

Sadly the IPOD generation have some justice in blaming the tax system for subsidising the BTL investor, to price them out of the housing market and then turn them into life long rent slaves.
It is so unfair:

Ageing taxpayers owe the iPod generation

http://www.ft.com/cms/s/0/fcf257fe-6ef8-11e2-9ded-00144feab49a.html#axzz2X9PNOrJt

I know someone who bought a falling capital value, foreclosed property venture back circa 1990, and lived in part of it, just to get back his interest relief on a massive mortgage.

Fortunately the subsequent home price inflation made the numbers come right.

John_Pierpoint

One last thought keep an eagle eye on your parents - don't let them pull a trick like dying, leaving you as their executors and sole beneficiaries, before putting that loan agreement through the shredder.

agrinnall

How about if the OP makes the repayments directly to the lender rather than via the parents, would that get round their liability for income tax?