Money intended as loans, but registered as 'gifted deposit'

TAB_NL

Dear All,

I’m currently helping a relative, who’s suffering from depression/mental problems, to resolve an ongoing financial issue.

The situation is, as far as I understand:

1. The relative is a Dutch national, living in the Netherlands (As am I)

2. He has provided financial assistance to family friends, living in the UK, that were buying a new house in the UK. His intention was to:

1. Provide a tax-free gift (under dutch tax-law) of about €100.000

2. Provide an interest-only loan about €150.000

3. Provide a bridging loan of about €300.000, so they could keep living in the old house prior to buying the new one

These arrangements, including the interest rate, and period of the loans, were recorded in written documents and agreed between both parties. After providing the money, also (parts) of the loans, and interest have been repaid, as agreed upon.

However, my relative indicated to me that, during the process with the solicitor, he signed what he indicated as a 'gift form' (What, after reading, I’m assuming was a ‘gifted deposit letter’, trying to get this clear later this week), for the full amount (a + b + c), to speed-up the process.

Because of this, he thinks the whole sum should be considered a gift, and declared accordingly for taxes. My relative currently sees no other way out than to pay-back the previous payments made by the family friends, and consider the full amount a gift, which is causing even more mental issues. This would also mean the family friends need to pay considerable amounts of tax over the money.

It’s clear to me that, before providing the complete financial aid described under 2 (a + b +c), advice should have been obtained from an independent financial advisor, and that the whole problem described above could have been avoided if he did so. This is an ‘as-is’ situation, that I can’t change anything about right now. Right now, I’m just trying to find out if re-paying all previous payments, and thereby considering the full thing as a gift, is the best solution here.

To me it seems, the reason to sign a ‘gifted deposit letter’ is purely to indicate that there will be no legal rights over the property that’s bought using the money. From what I’ve seen in some message boards however, it’s not uncommon that solicitors ask to register small loans from family members as a ‘gifted deposit’, to simplify the process.

My question is: if a ‘gifted deposit’ letter is signed, can the amount (b+c)  still be registered as a loan in the tax-return anyway, or does the ‘gifted deposit’ letter also have direct tax implications (As I understand this is mainly a document for the bank)?

Based on the answer I want to decide if it’s worth getting a financial advisor to investigate this option further, or if it’s better to consider the whole thing a loan after all and repay previously made payments.

user1977

If you're asking a Netherlands taxation question (and it sounds like you are), I don't think this is the best place for it.

I presume your friend's friends have bought a property with the help of a mortgage loan, and have fraudulently told their mortgage lender that the loan from your friend was in fact a gift? It "simplifies the process" in the sense of misleading the bank into thinking there was no other lender involved in the property or the borrowers' commitments.

johnhenstock

Not financial advice and I’m not endorsing what I’m explaining.

This happens a lot. Not with such eye watering amounts, but “gifted” deposits that are paid back once the property is bought are the order of the day. It is NOT fraud if the deposit is indeed gifted with the intention for it to be a gift AND the ones benefiting from it decide to give the same amount back at a later stage. After all, you may not be comfortable with the idea of such a large gift in time.

As you said, the document signed is mainly for the bank and has no further inplications for tax, though I don’t know if the same can be said about NL law.

TAB_NL

Thanks @user1977 and @johnhenstock for your responses!

Indeed I’m not asking for advice with respect to Dutch taxes. I’m actually asking about the UK situation, since I think that, the status of the money for the UK tax return of the family friends should be in sync with the status of the money on the Dutch tax return of my relative. I’m assuming, in the UK, any debts, such as loans, also need to be included in the information for the tax return?

Regarding whether the whole thing is formally a gift or not:

• 2a: Definitely a gift

• 2b: The intention was for it to be a gift, no repayments, and no rights over the property whatsoever, as probably signed for in the gifted deposit letter. However, gifts are subject to 30 - 40% tax in NL. By making it an interest-only loan, this is avoided for now. The will of my relative states that this becomes an official gift when he passes, at which point the family friends still have to file a ‘inheritance tax return’ with the dutch tax administration.

• 2c: I believe this should never have been part of the gifted deposit letter to begin with, nor should it currently be relevant for the mortgage, since it was for a different property, that’s since then been sold for a higher figure.

The gift/gift back method, that @johnhenstock mentions was probably not chosen because in that case, gift tax, 30-40%, needed to be payed on both transfers (I know, not a good reason...)

Also, now that I come to think of it, 2c may not even be relevant for the Dutch tax-return at all, in case all things (loan + repayment) happened in the same year. I believe for Dutch tax-returns, only the amounts on the 1st of January of a year matter (or at least, I believe they do for taxation of assets…). Is this also the case for UK tax returns?

Summarizing the questions:

1. Is my assumption correct that debts are also registered in a UK tax return?
2. Can 2(b) be registered as a loan in the UK tax-return of the family friends, given the considerations above?
3. Regarding 2(c), if the loan, and repayment are within the same year, will it even show up on a UK tax return?
   

user1977

No, there's no UK tax relevance to whether it's a gift or a loan (other than when it comes to Inheritance Tax if one of the parties dies). Tax would only come into it if there was interest being paid (on which Income Tax may be chargeable). No need to think about it for tax returns (which most people in the UK don't need to complete anyway).

TAB_NL

Ok great, thanks for you quick answer! We've decided to let a finance professional take a look at the situation. Thanks everyone for your contributions!