Paying a mortgage indirectly - tax implications etc

DrGronod

Hi

I have an interest-only mortgage which was used as a bridging loan for a relative's house buying (now all sorted). The relative pays the mortgage payments but indirectly - they pay me the exact amount which then goes straight to the lender a couple of days later. It has been convenient for them to keep the loan going as they have other property which they get an income from. Otherwise they would probably have to sell that property to replay the loan in full - the income they get from that is greater than mortgage payments so they prefer to leave it that way whilst they can.

I'm trying to understand what implications does this all has for me. Should these payments be treated as "income" for tax purposes, although they get paid out immediately? Is there anything else I should consider? I would stand to inherit the money/property on death so feel it is safe in that respect.

The mortgage was taken out against my house and is the only charge against it. We also have a signed an agreement regarding paying back the loan by a date before the loan expires.

My gut feeling is that I shouldn't let this run for too long, but not sure why, as it is apparently good for all parties at the moment so can't justify it if I don't have to.

Thanks.

purdyoaten

Not income - it is a repayment of a loan. Hopefully, there is sufficient documentation and you are not charging more interest than you are incurring - which would be taxable.

More importantly is the inheritance tax issue - the estate value should reflect the loan. Again - documentation !!

zygurat789

purdyoaten wrote: »

Not income - it is a repayment of a loan. Hopefully, there is sufficient documentation and you are not charging more interest than you are incurring - which would be taxable.

More importantly is the inheritance tax issue - the estate value should reflect the loan. Again - documentation !!

Purdy, this is an interest only loan. If this is a mortgage on a home then the interest paid will not be allowable. The money borrowed was relent and any receipts are all interest, are they not taxable income?

purdyoaten

zygurat789 wrote: »

Purdy, this is an interest only loan. If this is a mortgage on a home then the interest paid will not be allowable. The money borrowed was relent and any receipts are all interest, are they not taxable income?

Good point - have to say that I was simply looking at it from the view that the op has borrowed money to lend to someone else and the repayments were simply that -repayments of a loan. I ignored the fact that it was a mortgage.

getmore4less

Taxable income twice.

You have given them an interest bearing loan if they are paying you interest.

The income they are getting from their other property will also be taxable unless they structured the loan from you to get tax relief.

Probably too late to fix it now.

DrGronod

Thanks for all replies so far.

So the basic "income" I have been getting is from the interest on top of the repayments? Although the signed agreement just said the loan would be paid back at a monthly sum of "£xxx.xx" which just so happens to be the mortgage payment amount. If the full loan is paid off earlier than the term of the mortgage then who would they know what any extra is - how could it be definitely viewed as interest? Surely it could be split and the extra viewed just as a gift (with all implications of a gift, depending on the amount)?

BTW - the other property generating the income to pay the mortgage was an old-standing rental and fully declared in any accounts. So shouldn't be a problem there.

So still not really clear in my mind if there is a hidden problem here or not!

zygurat789

DrGronod wrote: »

Thanks for all replies so far.

So the basic "income" I have been getting is from the interest on top of the repayments? Although the signed agreement just said the loan would be paid back at a monthly sum of "£xxx.xx" which just so happens to be the mortgage payment amount. If the full loan is paid off earlier than the term of the mortgage then who would they know what any extra is - how could it be definitely viewed as interest? Surely it could be split and the extra viewed just as a gift (with all implications of a gift, depending on the amount)?

BTW - the other property generating the income to pay the mortgage was an old-standing rental and fully declared in any accounts. So shouldn't be a problem there.

So still not really clear in my mind if there is a hidden problem here or not!

If your loan to the BS (?) is interest only it is not being repaid.
If the loan you have given is being repaid then thert is no interest!!!!!

xylophone

You took an interest only loan against your property. You have to pay interest on that loan.

This gave you a lump sum of money.

You chose to lend that money to your relative against a loan agreement with him.


What were the terms of that loan agreement? Capital only or capital and interest?

If he is simply repaying capital at an agreed amount, then you are not receiving interest on the loan you made?

getmore4less

If it is an interest only mortgage and the payment is the same as the interest it fairly clear that was the intent.

What are the exact terms of the loan agreement

Claiming the payments are gifts will just bring it under connected transactions.

As with a lot of taxable situations there is an element of voluntary declarations.

Do you feel lucky.

DrGronod

zygurat789 wrote: »

If your loan to the BS (?) is interest only it is not being repaid.
If the loan you have given is being repaid then thert is no interest!!!!!

Sorry, yes the mortgage is interest only (getting mixed up with my wording for a sec). But whether the payments I get are viewed as interest or repayments is the question!

xylophone wrote: »

You took an interest only loan against your property. You have to pay interest on that loan.
This gave you a lump sum of money.
You chose to lend that money to your relative against a loan agreement with him.

What were the terms of that loan agreement? Capital only or capital and interest?
If he is simply repaying capital at an agreed amount, then you are not receiving interest on the loan you made?

Yes, the agreement is simply that the loan is repaid (capital only), and I'm not "officially" being paid interest. But the payments just so happen to match the interest payments I make to the bank....

getmore4less wrote: »

If it is an interest only mortgage and the payment is the same as the interest it fairly clear that was the intent.

What are the exact terms of the loan agreement

Claiming the payments are gifts will just bring it under connected transactions.

As with a lot of taxable situations there is an element of voluntary declarations.

Do you feel lucky.

Yes, this appears to be the nub of the question. The loan agreement just mentions repayments, no interest. But obviously there will be a difference when the loan is eventually paid back, as the "repayments" would be deducted from it - which is where some sort of gift would have to be sorted out. What form that gift would be is another matter (i.e. doesn't have to be money)!

But if all this is sailing rather close to the wind I would rather declare it up front (I do submit a yearly tax return). Just how clear is the "intent" of these payments I receive to be viewed as interest on the loan even if not stated? And if it is, is it just a matter of declaring all this interest as income?

getmore4less

DrGronod wrote: »

Yes, the agreement is simply that the loan is repaid (capital only), and I'm not "officially" being paid interest. But the payments just so happen to match the interest payments I make to the bank....?

What does it actually say?

How much in total will you be getting back?


If you end up getting more back than you gave them then there is an element of interest Sure I saw some example in the HMRC manual on this sort of arrangement. Might be worth a search.

trying to hide it in some kind of gift/gesture from them is likely to be tax evasion.