Loan to a family member - Registering a charge against their property

Lancelot6

Hi,

I wonder if anyone can help me to understand any tax implications of a loan we (wife and I) are making to my daughter and her partner.

We intend to loan £150,000 in order them to buy a house.  We will be paid back monthly at a set rate, without any interest being paid.  In other words, we get back what we loan.

In order to protect ourselves, and our daughter and partner, we are having a loan agreement drawn up by a solicitor.  It is simply to officialise and make sure both parties know what is expected, and to include clauses to state what happens under certain circumstances, such as sale of the property, deaths, etc.

Our solicitor has suggested that we should register a charge against the property at the land registry as security, to protect ourselves.  We are keen to do this.

The question (which our solicitor will not answer, as they are not allowed to give tax advice) is:-

If we register a charge against the property bought with the loan, then what if any tax implications might any of us face?  My wife and I own our own home outright, we are retired and basic tax payers.

• I am thinking about any circumstances really, but specifically if the property is sold before the loan is paid back (I presume we would have to agree to this)?
• Any deaths?
• Removing the charge, once the money is paid back?
• Anything else anyone can suggest, any other snags?

Thanks for reading.

Lancelot.

Jeremy535897

The first question you need to consider is whether the property will be owned by your daughter, or both of them. You could understandably prefer to have the property in her sole name and the loan entirely to her. The implications of that depend in part on the nature of the relationship between your daughter and her partner. If they are married or in a civil partnership, it may be less important.

If you register a charge against the property, then it cannot be sold without your consent. A third party lender may also insist on the borrowers taking out life cover (term assurance at least) to enable the mortgage to be repaid on a death, so you might wish to do this.

Removing a charge when the debt is satisfied is a straightforward matter. If your daughter dies, remember that she may well leave her share of the property to her partner.

From an inheritance tax point of view, you will be making a transfer of value because the value of the loan will be less than its face value, as no interest is payable. It will be a potentially exempt transfer. The existence of a charge should reduce the quantum, but if it is to be over a substantial period of time, the transfer of value could be quite large.

It is all very well putting arrangements in place to mimic a third party loan (minus the interest), but be aware that they are only relevant if you would realistically enforce them in the case of a default.

Lancelot6

Jeremy,

Thank you for the reply.

We are loaning the money to both of them, and so they each owe half of the loan, and as they are buying the property, not us, then they own half of the property each.  We expect each to pay half of the monthly installments.

Our hope is that if either die, then the fraction of the debt already paid by the deceased transfers to the other, along with the remaining debt.  Thus the survivor now owns twice as much of the property ( I assume they will need to get wills written), but they also now have twice the remaining debit.  We are still owed the remainder.

We will have a clause stating that if they do not pay the monthly fee (individuals fee doubles on the death of one of them), then we can at this point (at our discretion) call in our loan, and they would have to give us the remaining debit.  We are not aiming to rigidly inforce, or be inflexible, we simply want to be able to "keep things moving".

Without the loan, our daughter would eventually inherit everything we leave anyway.

I don't entirely understand, but I think you are saying that such a loan would help with inheritance tax because it will act as multiple gifts over time?  If so that would be great, but as I say, our main worry is if a charge against the property would give rise to any tax issues, or stamp duty, or any other losses for my wife and I.

Lancelot

Grumpy_chap

Lancelot6 said:

Hi,

I wonder if anyone can help me to understand any tax implications of a loan we (wife and I) are making to my daughter and her partner.

We intend to loan £150,000 in order them to buy a house.  We will be paid back monthly at a set rate, without any interest being paid.  In other words, we get back what we loan.

In order to protect ourselves, and our daughter and partner, we are having a loan agreement drawn up by a solicitor.  It is simply to officialise and make sure both parties know what is expected, and to include clauses to state what happens under certain circumstances, such as sale of the property, deaths, etc.

Our solicitor has suggested that we should register a charge against the property at the land registry as security, to protect ourselves.  We are keen to do this.

The question (which our solicitor will not answer, as they are not allowed to give tax advice) is:-

If we register a charge against the property bought with the loan, then what if any tax implications might any of us face?  My wife and I own our own home outright, we are retired and basic tax payers.

• I am thinking about any circumstances really, but specifically if the property is sold before the loan is paid back (I presume we would have to agree to this)?
• Any deaths?
• Removing the charge, once the money is paid back?
• Anything else anyone can suggest, any other snags?

Thanks for reading.

Lancelot.

Given you obviously have a fortunate financial position and this is a large amount of money involved, plus the limitations of any public forum to give very detailed advice, the best thing would be to follow the lead of your Solicitor and engage an Accountant to work with the Solicitor and provide the specialist tax advice to the solution to work with the legal advice from the Solicitor.

I assume you have any Accountant in any case given your financial position, so the additional fees should not be that great.

Are you providing the full loan that your daughter and her partner require to complete the property purchase?

Jeremy535897

Lancelot6 said:

Jeremy,

Thank you for the reply.

We are loaning the money to both of them, and so they each owe half of the loan, and as they are buying the property, not us, then they own half of the property each.  We expect each to pay half of the monthly installments.

Our hope is that if either die, then the fraction of the debt already paid by the deceased transfers to the other, along with the remaining debt.  Thus the survivor now owns twice as much of the property ( I assume they will need to get wills written), but they also now have twice the remaining debit.  We are still owed the remainder.

We will have a clause stating that if they do not pay the monthly fee (individuals fee doubles on the death of one of them), then we can at this point (at our discretion) call in our loan, and they would have to give us the remaining debit.  We are not aiming to rigidly inforce, or be inflexible, we simply want to be able to "keep things moving".

Without the loan, our daughter would eventually inherit everything we leave anyway.

I don't entirely understand, but I think you are saying that such a loan would help with inheritance tax because it will act as multiple gifts over time?  If so that would be great, but as I say, our main worry is if a charge against the property would give rise to any tax issues, or stamp duty, or any other losses for my wife and I.

Lancelot

The only tax implication to you and your wife of you taking a charge over the property is that it may reduce the quantum of the PET, because a secured loan at no interest is worth more than an unsecured one at no interest. (A loan with a second charge would be worth less than one with the first charge, as it would be more risky to you, as Grumpy points out. The PET made is on the date of the loan, because that is the point at which the transfer of value takes place, assuming your mortgagees can enforce the terms. There isn't any ongoing stream of PETs, unless you allow payments due to be delayed or the loan is forgiven in whole or in part.