If family loans you money to buy house does it count against you with the bank?

kiwi84

Hi Everyone this is my first post, hello money saving experts!

My partner's parents are wealthy, we are not. They have offered us enough money to buy a house outright, needing no mortgage. My partner's name would be the only one on the title deeds. They say that their solicitor has advised them to do this in the form of a loan agreement between them and my partner, however, unofficially they would never expect us to pay it back and are happy never to see the money again. They claim this is the best way to avoid inheritance tax. I know you can gift large amounts of money providing the giver doesn't die within 7 years. Both his parents are in their late 60s and in quite good health, there is no reason for us to be concerned that either one of them will not be here in 7 years time. My main worry is that we would not be able to borrow against the house in future if we, e.g. wished to set up our own business, because this debt would count against him.

Do banks have access to private loan agreements like this? They are drawing up papers with a solicitor, so there will be a record of it. I also worry it will complicate things should we wish to sell it in the future, even though it will be his name only on the deeds. His parents are quite controlling people and I feel that they are doing it this way purposely so that we can't borrow against the house or resell without their permission and involvement. My partner and myself are not young or untrustworthy, and it's difficult to explain the complexities of the family relationship without it sounding like I'm complaining that someone is buying us a house! It might be easier to just stay poor, and we have turned down offers of financial assistance in the past so that we are not obligated to them.

Sorry for a long complicated post , does anyone have any advice regarding any of this?

Mistral001

Gift horse, mouth etc.

iolanthe07

They have offered us enough money to buy a house outright, needing no mortgage.

Then you are truly blessed and very lucky indeed. I would grab it before they change their minds.

CLAPTON

kiwi84 wrote: »

Hi Everyone this is my first post, hello money saving experts!

My partner's parents are wealthy, we are not. They have offered us enough money to buy a house outright, needing no mortgage. My partner's name would be the only one on the title deeds. They say that their solicitor has advised them to do this in the form of a loan agreement between them and my partner, however, unofficially they would never expect us to pay it back and are happy never to see the money again. They claim this is the best way to avoid inheritance tax. I know you can gift large amounts of money providing the giver doesn't die within 7 years. Both his parents are in their late 60s and in quite good health, there is no reason for us to be concerned that either one of them will not be here in 7 years time. My main worry is that we would not be able to borrow against the house in future if we, e.g. wished to set up our own business, because this debt would count against him.

Do banks have access to private loan agreements like this? They are drawing up papers with a solicitor, so there will be a record of it. I also worry it will complicate things should we wish to sell it in the future, even though it will be his name only on the deeds. His parents are quite controlling people and I feel that they are doing it this way purposely so that we can't borrow against the house or resell without their permission and involvement. My partner and myself are not young or untrustworthy, and it's difficult to explain the complexities of the family relationship without it sounding like I'm complaining that someone is buying us a house! It might be easier to just stay poor, and we have turned down offers of financial assistance in the past so that we are not obligated to them.

Sorry for a long complicated post , does anyone have any advice regarding any of this?

makes no sense

if it is a gift then if they live for 7 years then there will be no IHT to pay.

if it is a loan then it stays part of their estate and so means that IHT will be paid however long they live.

so what is the real reason for this arrangement?

Clive_Woody

Unless this loan is registered with one of the credit reference agencies then as far as I know it will never be visible to any mainstream lender therefore should not prevent any future borrowing. The only thing I can think off is you were asked on a loan application form if you had any other outstanding loan or debt then you would need to declare this family loan.

I am not 100% sure but I am not convinced that they have this right regarding inheritance tax. If this was given as a gift to your partner then the 7 year clock starts ticking but if it were a loan then I assume upon their death it would still be considered outstanding and therefore an asset of their estate therefore liable for taxation.

I am no expert on either of these areas so hopefully somebody will be along in a bit with more expertise.

I assume that this is not negotiable with the parents?

longtermplanner

I agree with CLAPTON - setting this up as a loan is a way that maximises the amount of IHT there may be; a gift would minimise it.

My suggestion to you is that you accept this loan/gift but then live your life as though you were paying rent or a mortgage ie you salt away £800 a month or whatever you are currently paying in an account that you never ever touch. This is then there as a resource for you if they ever decide they want to jerk you around.

Vikipollard

"My partner's parents are wealthy, we are not. They have offered us enough money to buy a house outright, needing no mortgage. My partner's name would be the only one on the title deeds. They say that their solicitor has advised them to do this in the form of a loan agreement between them and my partner, however, unofficially they would never expect us to pay it back and are happy never to see the money again"


I might be being a bit thick here, but how would your partner prove it would never be expected to be paid back? There will be an official loan agreement...


What happens if there is a fall out with his parents? It's either a gift or it's a loan - it surely can't be both. Others who may have a claim on their estate will surely pursue the repayment and there would be no way to disprove it is owed.


I have no experience with IHT or anything so I can't comment on that. I did think there were some rules around them disposing of assets within seven years in the event they needed a care home etc, but as I say, I don't know enough to be able to comment with any degree of certainty.


Personally I wouldn't take it on the terms suggested. As someone else suggested, put the equivalent loan amount away as if you were paying the loan back because I have a nagging feeling this will come back to nibble dangly bits.

dealer_wins

longtermplanner wrote: »

I agree with CLAPTON - setting this up as a loan is a way that maximises the amount of IHT there may be; a gift would minimise it.

My suggestion to you is that you accept this loan/gift but then live your life as though you were paying rent or a mortgage ie you salt away £800 a month or whatever you are currently paying in an account that you never ever touch. This is then there as a resource for you if they ever decide they want to jerk you around.

Follow this great advice!!

troubleinparadise

Dear Kiwi84,

Whilst not wishing to be negative in the face of what may appear to be a generous offer, the requirement that this property would then be in your partner's name only might leave you in a vulnerable position.

It is either a gift or a loan, it can't really be both - what is the plan should (heaven forbid) your OH pre-decease his parents - do they take their "loan" back again, or does the house then become part of his estate?

I think you need to take legal advice yourselves on this offer and the suggested "loan" contract.

kiwi84

Hi thanks for the advice everyone. I was feeling like it was a very strange way for his parents to go about things, and it is becoming clearer that what they actually want is for us not to be able to touch the money even if it is in my OH's name. It's a bit hard to sum up all the family politics behind it, but basically his Mum needs to be in control of everything in her family's life and uses money to try and bribe people into doing what she wants. She must have thought she was pulling the wool over our eyes by saying it was to avoid IHT, but really it's so we can't use it to do anything she doesn't approve of. We really want to start our own business, which she knows, but she doesn't trust us with the risk involved (even though it would only take a fifth of what they offered to pay for the house). So by tying money up in a house that we can't use, she is preventing us starting the business from it.

Mistral001, I appreciate it is a strange post where someone is complaining about being offered money, but really if you knew the family and the strings that would be attached if accepted, you would understand where I'm coming from. After discussing it further with the OH I think we are going to turn it down. Really makes me appreciate my own family where relationships are not complicated by money because we don't have any! I am not looking forward to the row, but thankyou again for helping me clear my head a little.

System

It sounds like a tough situation to be in; you have my sympathy. Bearing in mind what people have said on here about IHT, couldn't you use your partner's parents comments against them? By which I mean keep it friendly and act as though you 100% believed them when they said they were trying to avoid IHT. Explain that a friend of yours who knows about these things has said that you'd actually be more likely to be liable for IHT if it's a loan, so you assume they'll be giving you the money as a gift... They'll have to do some fast talking if they're going to find a reason why they don't want to do that, and if they argue you can act genuinely surprised and confused. Could avoid a row? Or at least be satisfying for you to see them squirm.

Out of interest, what do your partner and his dad think about all this? It sounds like your partner's mum who's driving the whole thing,