Tax implications of loaning a house deposit

AmyTurtle

Hi all
I'm expecting my first child with my partner - we aren't married.

My 85 year old Grandad rang yesterday and said that he had been going through his finances and had realised he actually has quite a lot more money than he has accounted for in his will. He has offered to lend OH and I some money for a deposit to buy a house as we are currently renting. His wife, my 73 year old step-grandma, wants to gift us the money but my Grandad is unwilling to do this as it would cause bad feeling if other members of the family found out.

Basically, he has offered to lend us a deposit, interest free - although we haven't discussed figures money is no object so he said as much as we need. He said we would pay back an amount each month that we can afford. When he passes away, we would continue to make repayments to his wife (he is assuming he will go first as he's older). Upon her death, the debt would die.

My question is, since this would be a loan rather than a gift, would the loan attract any gift tax or IHT upon his death? And legally, when he and his wife pass away, would the debt die or would we owe his/her estate money?

I'm aware mortgage lenders prefer deposits to be gifted rather than loaned but that's another hurdle!

TIA

anselld

AmyTurtle wrote: »

I'm aware mortgage lenders prefer deposits to be gifted rather than loaned but that's another hurdle!

The don't just prefer it, they insist. A loaned deposit will be a useful as a chocolate teapot.

booksurr

if you need a mortgage then a loaned deposit will impact the amount you can borrow on the mortgage or kill it entirely as you are basically saying you have no deposit and few lenders will give 100% mortgages these days

re tax:
the loan balance would remain a debt of the estate upon the death of grandad. If worded correctly the debt could be transferred to grandma but upon her death the executors would have a legal duty to collect in the monies still outstanding at that time. It would not die with the final death unless the will or written loan agreement makes specific provision for it to do so. That seems incompatible with the desire not to upset other beneficiaries.

there is no "gift tax" ever, there are however IHT implications on the estate of the person who gave the gift

somethingcorporate

And deptrivation of asset issues too potentially.

Errata

Not married, baby on the way, potless, grandad will lend the deposit money. The sound of sucked teeth will be deafening.

jjlandlord

This is not a question of 100% mortgage since the mortgage would still be secured against the property as the only charge: For that purpose a loaned 'deposit' is the same as a normal 'deposit' and does not affect the LTV.

However a loaned 'deposit' indicates that you do not have any cash, and means that you will have additional financial commitments (loan repayments).

AmyTurtle

Thanks for your advice - my OH thinks it's a great idea but I am wary. Grandad's wife and I are the executors of his estate but I'm not an executor of her estate.

My grandad won't put anything in writing at all, he'll just bung us 30k or whatever and expect us to pay it back as agreed. He lent me 9k a few years ago to pay off some debt and he just wrote me a cheque, I made a monthly payment to him until it was paid off and everyone was happy, but he was a lot younger and in better health then.

He always has huge amounts of cash at home - I was wondering if instead it would be wise for him to perhaps give us a cash amount each month which we would use for outgoings while "saving" our own money until we have the necessary amount? Would achieve the same thing without any tax implications/bad feeling in the family. We've got a year left on the lease of our flat anyway so can't do anything immediately.

Am I right in thinking he can only gift OH and I £250 each per year without attracting IHT?

Guest101

He can gift you all £30,000 in cash/cheque/bank transfer today.

That's not the issue.

The issue is the for money laundering purposes the solicitor will ask you where the deposit came from. (mortgage advisor will also ask you) You will say grandad (fine)

question2: Gift or loan? - they'll need a signe ddocument from your grandfather that it was a gift. Otherwise it is likely the mortgage will stall/fail.

As for giving you cash every month whilst you save up. Well this could work in theory, but how many months. They'll notice if you got from £800 outgoings per month to £300 without good reason. (that reason being your income is supplemented by your grandad)

AmyTurtle

We actually earn 60k+ between us and are debt free but OH was a mature student until recently so we have already started saving for a deposit, but this is a quicker route. Even when I'm on maternity leave our joint income will be £45k-ish

Just to clarify, I have never asked him to lend me money for a deposit, he literally rang me up out of the blue yesterday and offered. Of 10+ couples I know my age who own houses, not one has done it without family help. We pay nearly £900 a month rent now so a mortgage is affordable for us IMO, there's just no point doing this if it will cause issues and possibly family upset.

Guest101

AmyTurtle wrote: »

We actually earn 60k+ between us and are debt free but OH was a mature student until recently so we have already started saving for a deposit, but this is a quicker route. Even when I'm on maternity leave our joint income will be £45k-ish

Just to clarify, I have never asked him to lend me money for a deposit, he literally rang me up out of the blue yesterday and offered. Of 10+ couples I know my age who own houses, not one has done it without family help. We pay nearly £900 a month rent now so a mortgage is affordable for us IMO, there's just no point doing this if it will cause issues and possibly family upset.

So you take home £3,500 a month roughly.

Rent £900, Expenses another £600? So you can save £2k a month. Let's say 1.5k so you have some leeway.

So that's 18,000 in a year, when your lease expires. Deposit saved, buy a house that needs abit of work. Then get grandad to loan you for the work carried out, and pay him back.

AmyTurtle

No, we don't, because OH has student loans (but they aren't generally counted as an unsecured debt) and quite large travel expenses for his job - however we would possibly move much nearer his job which would cut out this expense. We've also only recently been able to start saving.

It's not so much we can't afford to save, we can and we will, it's more my grandad thought if he lent us a big chunk we would be able to take out a smaller mortgage with a better rate, while paying him back interest free.