Loan to family member legalities

1_rob_1

Hi,

An elderly family member has recently decided to move house and has now sold theirs, and put in an offer for another property.
The proceeds from the sale of this house falls about £10,000 short of the cost of the new house.
Me & my brother in law have both agreed to cover the shortfall, (£5,000 each). This is to be paid back from the estate upon death. (+ interest).
There will be other family members claiming from this estate, so we want to guarantee that we receive this 'loan' back.

What is the best way of setting up something like this, prefferably avoiding paying any tax on the interest paid to us?

We also had the idea of fixing the interest rate for an initial period of 10 years so that we do not have to mess about following the banks base rate.
This would give a steady annual figure.
Can this figure be gifted to us annually, but not actually paid until death?

Thanks for any replies

Rob

MarkyMarkD

If it's a loan with interest, then the interest is taxable.

If the elderly family member stated in his/her will that an amount should be payable to each person, which happens to equal £5,000+8% compound (or whatever), then that wouldn't be taxable.

But then you'd have no guarantee that the elderly relative wouldn't stitch you up.

The sort of thing you are proposing with gifted amounts representing interest is quite a clever idea, as you would at least know you were getting something every year. But it would be quite difficult to construct IMHO and for the interest of £5,000 a year rather OTT, don't you think?

Wouldn't a better solution to be that you and your brother-in-law legally take a share in the property, as then your share will increase in value in line with the property value? There would be CGT on this, but the gain on an initial amount of £5,000 is unlikely to be over your personal CGT allowance.

1_rob_1

Hi,
I know that if the loan is with interest it is taxable.
Im trying to find a loophole in the system to avoid this.

We did think about taking a share in the property, but prices in this area are stable at the moment & we do not think that they will rise above the rate of inflation.

The elderly relative is 100% trustworthy but also wants whatever agreement we make drawn up in a legal document to secure our money upon death.

The sort of thing you are proposing with gifted amounts representing interest is quite a clever idea, as you would at least know you were getting something every year. But it would be quite difficult to construct IMHO and for the interest of £5,000 a year rather OTT, don't you think?

I have no idea how something like this would be constructed so I dont know whether or not it would be OTT. The part of this idea which is confusing me is how to have a set figure 'gifted' to us annually to avoid any tax but not to actually receive it until the death of the person.

Have you any idea how this could be done?

Thanks for the reply

Rob

weezl74

hiya, this might be a dumb question, but unless you're going to hit the in heritance tax threshold, couldn't your relative bequeath you and your brother-in-law the amount plus interest in his/her will?

L

MarkyMarkD

That's what I already said:

If the elderly family member stated in his/her will that an amount should be payable to each person, which happens to equal £5,000+8% compound (or whatever), then that wouldn't be taxable.

Given that the OP states that the elderly relative is 100% trustworthy, then there is really no need to go through all the mental torture implicit in a "cunning scheme".

Simply ask the elderly relative to insert the clause in the will stating that you'll each receive £5,000 plus x% per annum from xx xxxxxxxxy 2007 to the date of death. Or better, have a loan agreement interest free for the £5,000 and then just include "a gift calculated as x% compound on £5,000 etc. etc." in the will.

Job done!

weezl74

yep, you did sorry.