Interest Rolling Up - Advice Needed

super_reds

My wife and I are thinking of helping out my MIL by effectively doing an equity release for her so she can stay in a nicer property. We would charge interest but not at the high rates that Equity Release providers charge.

Interest would roll up (as she wouldn't be able to pay it otherwise) until she sells the house either directly or it passes to her estate

Any thoughts as to how best to structure the loan so that the least tax could be paid?

TIA

xylophone

Do you mean that you are intending to make an interest only loan to your MIL, secured against a first charge on her property?

You should see a solicitor about drawing up a formal agreement.

The interest received is taxable according to your individual circumstances and may need to be declared to HMRC.

https://www.gov.uk/government/publications/personal-savings-allowance-factsheet/personal-savings-allowance

You could opt to roll up the interest but this could lead to your being pushed into a higher tax band.

https://www.taxation.co.uk/Articles/2014/08/12/329201/property-purchase

super_reds

xylophone wrote: »

Do you mean that you are intending to make an interest only loan to your MIL, secured against a first charge on her property?

You should see a solicitor about drawing up a formal agreement.

The interest received is taxable according to your individual circumstances and may need to be declared to HMRC.

https://www.gov.uk/government/publications/personal-savings-allowance-factsheet/personal-savings-allowance

You could opt to roll up the interest but this could lead to your being pushed into a higher tax band.

https://www.taxation.co.uk/Articles/2014/08/12/329201/property-purchase

Yes would be an interest only loan secured by first charge on her property and yes would all be done via a Legal agreement drawn up by a Solicitor.

Would the interest get taxed annually thus utilising annual £1k allowance or in one big lump when received?

Am wondering if there was anything to structure this so that overall tax was reduced? Incorporation? Some sort of way that the interest became payable from the estate when she died and so was subject to IHT thresholds?

Any thoughts appreciated

Pennywise

super_reds wrote: »

Would the interest get taxed annually thus utilising annual £1k allowance or in one big lump when received?

Interest is taxed when it's received, not when it's accrued.

xylophone

The interest will be taxed when you receive it.

You and your spouse could opt to receive it monthly or annually and for tax purposes it will be treated like any other interest - if you don't receive it for (say) twenty years, you will be taxed on the amount of interest you receive in the tax year that you receive it in accordance with the tax regime at the time.

You could find that the receipt of a large sum in interest puts you into a higher rate band.

super_reds

xylophone wrote: »

The interest will be taxed when you receive it.

You and your spouse could opt to receive it monthly or annually and for tax purposes it will be treated like any other interest - if you don't receive it for (say) twenty years, you will be taxed on the amount of interest you receive in the tax year that you receive it in accordance with the tax regime at the time.

You could find that the receipt of a large sum in interest puts you into a higher rate band.

Thanks, I think the problem will be that there is no way of really receiving the interest more frequently, my MIL won't have spare income to service the debt so it will only be received on her selling the house or passing away. Unless what you are saying is advance further funds and her pay the same amount of interest simultaneously for tax purposes?

xylophone

You will need a solicitor to draw up the agreement - he will not advise on tax mitigation but may be prepared to recommend a tax accountant to assist you in this area.

As I understand it, the basic position is that rolled up interest will be taxed on the recipient in the year that it is received.

Even if the loan were structured in such a way as there was to be no interest, but on repayment, the capital value was to be increased by reference to a rate of inflation, you might still encounter difficulties with HMRC's interpretation as to the precise nature of the money received.

Savvy_Sue

If you don't NEED the interest payments, is it worth actually charging interest? Is it possible to make an interest free loan in return for a charge on the property? Can you make the charge larger than her immediate needs IYSWIM?

polymaff

Is your wife sole inheritor and her mother's estate within the IHT threshold? If so, you could just pay the MIL a stipend?

super_reds

Savvy_Sue wrote: »

If you don't NEED the interest payments, is it worth actually charging interest? Is it possible to make an interest free loan in return for a charge on the property? Can you make the charge larger than her immediate needs IYSWIM?

Whilst we don't need the interest I think it equitable to do so as my wife wouldn't be the only person to benefit from the estate. If don't charge interest then either my wife or her sibling would probably inherit more than a fair share of the house if that makes sense.

super_reds

polymaff wrote: »

Is your wife sole inheritor and her mother's estate within the IHT threshold? If so, you could just pay the MIL a stipend?

She wouldn't be the sole inheritor and hence the problem to make it fair for all parties I think interest should be charged.