How do you avoid higher rate tax on savings interest

Ocelot

ColdIron said:

With the pension contribution you'd only pay £2,500 tax and have £10,000 extra for the new house, a £2,500 improvement now, not in the future

That's assuming the pension doesn't go down constantly, like all mine seem to.

MacPingu1986

xylophone said:

 As far as I can see, there is no problem with the OP lending her parent the money at nil interest and repayable on demand.


She can ( and i'd say should) set up a signed and witnessed document as a formal record of the loan.
 

The parent can use the money as she chooses.


If the parent chose to deposit the cash in interest bearing current accounts, that interest would  belong to the parent.


Let's suppose the parent is not required to repay the loan for six months or so  and earns  around £5000 in interest during that time.

As it would appear that this lady is in receipt of only a modest amount of non-savings income, it is possible that she would not be liable to tax on this interest.

She might choose to keep the interest for herself  or  to make a gift to her spouse. She and the spouse might choose to use their IHT  gift allowances in favour of their daughter.


Again as far as I can see, all this would be  perfectly legal.

HMRC would know about the interest earned by the parent through the standard reporting system.

Only if she received interest over £10,000 per annum would she be required to advise HMRC personally.

There is no legal requirement for the parent to report any gifts made to HMRC. 

*Individually* there's no problem with lending money to your parents, and *individually* parents can make gifts to their children, BUT - You're not looking at the arrangement as a whole which, if HMRC were to investigate, would look (and of course based on the whole premise of this thread - is) - an artificial structure to avoid tax.

If HMRC asked the OP why the loan was made (given it's pretty unusual to loan £250k to your parents) and then why the interest was credited back (given that if it's a 0% loan it's pretty unusual to then treat the investment proceeds of the loan *as if* there has been interest payable to the lender) - what would they say?

thegentleway

I use to dream up these kinds of schemes as well, until I read this:

“Nothing will ever befall me that will receive with gloom or a bad disposition. I will pay my taxes gladly. Now, all the things which cause complaint or dread are like taxes of life — things from which, my dear Lucilius, you should never hope to exemption or seek escape.” — Seneca, Moral Letters, 96.2

Income tax is not the only tax you pay in life. It’s just one of the financial form. Everything we do has a toll attached to it. Waiting around is a tax on traveling. Rumors and gossip are the taxes that come from acquiring a public persona. Disagreements and occasional frustration are taxes placed on even the happiest of relationships. Theft is a tax on abundance and having things that other people want. Stress and problems are tariffs that come attached to success. And on and on and on.

There are many forms of taxes in life. You can argue with them, you can go to great—but ultimately futile—lengths to evade them, or you can simply pay them and enjoy the fruits of what you get to keep.

xylophone

if HMRC were to investigate,

But why should HMRC investigate a private family arrangement?

There is no requirement I know of to have to report a loan I make to friends or family to HMRC?

Let's suppose that the loan was repaid and the parent simply kept the interest, where would be any illegality?

And supposing that the OP simply didn't want to complicate her own tax affairs with interest received and was simply happy to lend a

 parent the money until she required it herself?  Even if HMRC regarded the interest mother earned as a gift from the daughter, there is no

 need to report gifts at the time they are made and anyway the "gift" might fit within the daughter's gift allowance over one/two years?

If at a much later date the parent was to choose to make a gift to the offspring, how would  HMRC come into it?

There is no need to report a gift of any size to HMRC and if within the gift allowance no need even to keep a record of it?

lr1277

xylophone said:

if HMRC were to investigate,

But why should HMRC investigate a private family arrangement?

There is no requirement I know of to have to report a loan I make to friends or family to HMRC?

Let's suppose that the loan was repaid and the parent simply kept the interest, where would be any illegality?

And supposing that the OP simply didn't want to complicate her own tax affairs with interest received and was simply happy to lend a

 parent the money until she required it herself?  Even if HMRC regarded the interest mother earned as a gift from the daughter, there is no

 need to report gifts at the time they are made and anyway the "gift" might fit within the daughter's gift allowance over one/two years?

If at a much later date the parent was to choose to make a gift to the offspring, how would  HMRC come into it?

There is no need to report a gift of any size to HMRC and if within the gift allowance no need even to keep a record of it?

As suggested earlier in this thread, if it is a gift, the giver would have to survive 7 years for it not to be part of the estate for IHT purposes. And given the size of the gift, the amount would certainly go a long way towards reaching the IHT allowance.

In which case the giver could help the executor of their estate by keeping a record of the gift. I don't know if the exector would be liable if there is a gift they did not know about and hence not record in the paperwork for HMRC. But that would mean HMRC would  first need to find out about the gift and take action if the amount involved pushed the estatate into IHT liability territory.

Aretnap

penners324 said:

Is the housing market going to slow down? Timing this seems futile and counter productive. 

That feels like the biggest question to me.

Back when I got my first proper job in 2002 I convinced myself that the housing market was ridiculously overheated and that prices were bound to come down, so I delayed buying my first house . Luckily only by 18 months.

I once sat down and tried to work out what those 18 months had cost me, totting up the higher price I paid for the house, extra mortgage payments on that money, eighteen months rent, lost interest payments on 18 months rent etc etc. It came to well over £50K over the course of my working life.

A bit of tax on a bit of interest is a rounding error compared to the risks the OP is taking with the housing market. I hope it works out better for him than it did for me.

george4064

Never mind the risk of your parent not returning the funds, you would be in a spot of bother if something happened to your parent (accident, injury or something else) which meant you’d have to make your case with probate or the courts to get back that money. That money which was no longer yours once you had transferred it from your account to your parent’s.

MacPingu1986

xylophone said:

if HMRC were to investigate,

But why should HMRC investigate a private family arrangement?

HMRC have grounds to investigate private family arrangements when they are used to evade tax.

There is no requirement I know of to have to report a loan I make to friends or family to HMRC?

Correct there is no requirement to report a loan in itself, but where that loan is an artificial arrangement/structure used to evade tax the OP should be declaring it to HMRC through their tax return.

Let's suppose that the loan was repaid and the parent simply kept the interest, where would be any illegality?

No, because in this different scenario no interest has been received by the OP through the arrangement so no tax liability has arisen.

And supposing that the OP simply didn't want to complicate her own tax affairs with interest received and was simply happy to lend a parent the money until she required it herself?  Even if HMRC regarded the interest mother earned as a gift from the daughter, there is no need to report gifts at the time they are made and anyway the "gift" might fit within the daughter's gift allowance over one/two years?

If the OP doesn't want to complicate their own tax affairs but still receive the interest then they can either utilize their ISA up the allowance, make a gift to their spouse, or to place the income in a non-interest bearing account. 

Declaring interest received and paying the tax due on it is a *very* low level of complication (the creation of these proposed structures are more complex) - HMRC absolutely wouldn't entertain not wanting the complication of paying tax as a defense to not paying tax due.

If at a much later date the parent was to choose to make a gift to the offspring, how would  HMRC come into it?

There is no need to report a gift of any size to HMRC and if within the gift allowance no need even to keep a record of it?

It's not a gift - it's an artificial structure that the OP has set up to avoid their bank declaring the interest to HMRC. Re the likelyhood of HMRC detecting the increased level of interest on the parents account and making any link that prompts further investigation -  I have no idea.

As a board however - we shouldn't be encouraging the OP to enter into something to evade tax in the hope that HMRC won't detect it.

Responses above... The theme here is that you're trying to break this down into individual parts (which by themselves don't create tax liabilities) and not looking at the whole arrangement. HMRC look at the arrangement as a whole to determine whether tax is due - and this sort of arrangement is almost certainly likely to be viewed as artificial and the OP liable for the unpaid tax.

Swipe

The OP has had more than enough advice. I say let them now make their own decision and live with it.

xylophone

The OP has had more than enough advice. 

Not advice, as this is not permitted on the board. Only comment is allowed.