Loans with inflation-only interest - still liable for income tax?

stripey1969

If I loan someone say £10K, and charge them interest, then I'm liable for income tax on that interest.

But if the person takes ten years to pay me back, it's quite likely that inflation will mean that £10K won't be worth as much in 2024 as it does in 2014. So is there a way to take inflation into account without it being considered interest and taxed?

HappyMJ

Charging interest will take care of the inflation issue. If you add the interest received to your capital then as long as you have charged enough then the capital will have increased.

stripey1969

But then we'll end up having to pay income tax. We were hoping to avoid having to do a tax return each year!

purdyoaten

stripey1969 wrote: »

If I loan someone say £10K, and charge them interest, then I'm liable for income tax on that interest.

But if the person takes ten years to pay me back, it's quite likely that inflation will mean that £10K won't be worth as much in 2024 as it does in 2014. So is there a way to take inflation into account without it being considered interest and taxed?

You will be liable for tax on the interest in exactly the same manner as if you had placed the money in a savings account. No allowances for inflation.

somethingcorporate

Have you got a consumer credit license? (or have you looked into whether you need one?)

stripey1969

Thanks purdyoaten, that's useful to know.

Nope, no consumer credit license, but apparently you don't need one unless you make a habit of money lending when I certainly don't intend to do!

BillJones

PeacefulWaters wrote: »

They could return capital in full with no interest.

And then make a discretionary gift.

"That money was just resting in my account!"

It's disappointing when people on here suggest such sophistry as you are doing, to illegally avoid tax. What would you say if my bosses said that my bonus was a gift, to knock a few hundred thousand off my tax bill, would that be OK too?

stripey1969

I'm not keen on tax avoidance either. But if it takes the person 10 years to pay us back, I don't really want to take a hit on the many pounds' worth of difference between the value of 10K now and in the future. I was perhaps naively hoping the tax man wouldn't want to tax me for simply trying to get back the equivalent of what I loaned in the first place! It's not like I'm trying to make a profit here, just help out a family member who's fallen on hard times...

Tixy

Can't you just set the interest rate they pay you a bit higher?

E.g. if you want a 5% net return then charge them 6.25%/8.33% APR (depending on your highest rate of income tax)

bris

If you charge interest on the monthly payments then there is no way round the annual tax return. So if the payments are charged over 10 years the you need to decalre it every year.

I you spead the cost to pay back exactly 10k by the end of year 10 then there would be no tax to declare but your not going to do that, so it is interest and must be declared, as said inflation doesn't exist on a loan, in fact inflation would actually de value it over 10 years, if anything.

BillJones

stripey1969 wrote: »

I'm not keen on tax avoidance either. But if it takes the person 10 years to pay us back, I don't really want to take a hit on the many pounds' worth of difference between the value of 10K now and in the future.

I agree with you, it seems harsh that we are taxed on a "return" gross, not net of inflation, but that's the way that the tax laws work, and we don't get to avoid them just because we'd prefer not to have to pay.

As I alluded to above, I pay an awful lot of income tax, and would much prefer to pay less. I also pay tax on the interest that I earn on my deposits. It's annoying that I am taxed for spending money later instead of now, but we all have to live within the tax rules. Pretending that the interest was "a gift" is not within the rules, it's tax fraud.