Clever gifting out of excess income or not?

Notepad_Phil

kempiejon said:

Madeinireland101 said:

[Deleted User] said:

kempiejon said:

How is it clever exactly?

It's not.  It's as old as the hills.

Yes maybe it’s not clever but from my point of view it would be a clever way of avoiding a heap of paperwork and the risk that HMRC do not allow my gifting out of income because I haven’t documented things correctly.

Nah, I don't still don't get it. HMRC don't really care who you lend your money to. You're not gifting, nor is it out of income, it's from capital.
I think you're making up "the risk that HMRC do not allow" something you're not doing.

I think Madeinireland is just checking whether anyone here thinks that the HMRC might frown on such a plan e.g. perhaps someone has come across an article etc where the HMRC have added back the interest to the gifter's estate - it looks to me as though it would be perfectly fine, but if I was planning to do something similar then I'd probably come here and ask too.

Yorkie1

I know the focus is on cutting tax, but I suppose it would be remiss to not also consider what happens if the loan is still outstanding at the time you pass away. The executors have a duty to gather in all debts to the estate, so your children would ordinarily be obliged to repay the loan. It would be prudent to have conversations so that they have got things set up so that the funds could be accessed in a timely manner if required.

kempiejon

Perhaps I'm getting the wrong end of the stick again, not a gift, not out of income, I can't see what it might mean to any estate/HMRC relationship when a loan is made. Perhaps the answer to the question Clever gifting out of excess income or not?
In my opinion, not then. Neither gifting nor out of of income, clever we've covered I think.

silvercar

HappyHarry said:

Madeinireland101 said:

HappyHarry said:

This is a gift and loan scheme and not uncommon.  It often involves a trust but I can’t see any reason why you can’t loan the funds to your children directly. 

As it is a loan, the capital will remain as part of your estate, but the income or growth that your children make on your capital never belongs to you and so is exempt from inheritance tax. 

Not sure what your reference to excess income is about?

Yes I think you have got it and I think prehaps I’ve not been clear enough. I could give my kids £10k a year out of excess income and do all the rubbish of recording income and expenditure or I could lend them some of my wealth (which I’m suggesting here) and let them take the excess income directly - I guess I’m merely checking if there are any issues around doing this - I can’t see any, as yet, but just asking here if it’s viable - it seems that I haven’t explained it very well and so some people haven’t understood.

There are no tax issues - providing the children are over 18. 

Lots of parents loan children money to purchase a house with. The loan is often at zero percent interest, and the children, not the parent, get to keep any increase in the house value. What you are suggesting doing is pretty much the same thing.

If a mortgage is involved, lenders usually insist the money is a gift,, not a loan. 

HappyHarry

silvercar said:

HappyHarry said:

Madeinireland101 said:

HappyHarry said:

This is a gift and loan scheme and not uncommon.  It often involves a trust but I can’t see any reason why you can’t loan the funds to your children directly. 

As it is a loan, the capital will remain as part of your estate, but the income or growth that your children make on your capital never belongs to you and so is exempt from inheritance tax. 

Not sure what your reference to excess income is about?

Yes I think you have got it and I think prehaps I’ve not been clear enough. I could give my kids £10k a year out of excess income and do all the rubbish of recording income and expenditure or I could lend them some of my wealth (which I’m suggesting here) and let them take the excess income directly - I guess I’m merely checking if there are any issues around doing this - I can’t see any, as yet, but just asking here if it’s viable - it seems that I haven’t explained it very well and so some people haven’t understood.

There are no tax issues - providing the children are over 18. 

Lots of parents loan children money to purchase a house with. The loan is often at zero percent interest, and the children, not the parent, get to keep any increase in the house value. What you are suggesting doing is pretty much the same thing.

If a mortgage is involved, lenders usually insist the money is a gift,, not a loan. 

Indeed.

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Jeremy535897

There is no transfer of value or other tax consequence when one adult makes an interest free loan to another adult (so there are no settlement issues), so long as it is repayable on demand.
Where these arrangements fail is where there is no reasonable expectation that the repayment of the loan would be demanded, or where it cannot be repaid on demand, for example if a loan recipient bought a house with the money, and had no other funds with which to repay the loan.

Madeinireland101

kempiejon said:

Perhaps I'm getting the wrong end of the stick again, not a gift, not out of income, I can't see what it might mean to any estate/HMRC relationship when a loan is made. Perhaps the answer to the question Clever gifting out of excess income or not?
In my opinion, not then. Neither gifting nor out of of income, clever we've covered I think.

You are right - it’s not a direct gift and it’s not out of my income but the end result is the same in that they are gifted £10k per year as a result of the income they generate on my loaned capital. It’s all perfectly legal as far as I can see but I am just checking in case there is some angle that I can’t see. 

Let’s look at it in a different way - If I generate the £10k myself by keeping the capital and then gift them £10k a year out of my excess income then I need to keep detailed records to prove without any doubt that I have got £10k excess income and that the gifts  are made on a regular basis and that my standard of living is not reduced and that when I document all this I don’t make a mistake of allocating incorrectly expenses that are normal expenditure down to capital spend or as I have a joint account with my wife I don’t allocate some expenses incorrectly to her when it should have been for me and vice versa and my executor is clever enough to understand it all when the time comes to justify it all to HMRC. All of these are potentially things that, if I’m not careful enough, could trip me up in my desire to give gifts out of excess income and allow HMRC to say - you’ve not done that right so it doesn’t count.

I think the clever part is that I don’t have to do any of that - just setup a loan agreement with my kids - and yes they will know that the estate can demand it back - so effectively they still benefit from getting £10k a year from me free of tax. They both have a house so the money is aimed to benefit them in other ways - like maybe paying off their existing mortgage a bit quicker perhaps.

I’m effectively letting them generate their own excess income by lending them some of my capital so I can just ignore all the poxy hoops you need to jump through with HMRC to do it myself. 

Brie

Madeinireland101 said:

Brie said:

Who says the kids will give the money back?

I trust my kids but it’s a formal interest free loan so that could apply with any loan so not sure what your point is. 

So it's a gift or it's a loan?  It can't be both.  You said it was a gift in which case you could plead to the kids "oh I'm desperate!!" and they could say no.  If it's a loan then they just need to make whatever payments are arranged legally.  So basically my point is what if the kids say they won't pay it back?  What if the kids have partners and are going through a split and then the money is their asset (not yours) as it's a gift and not a loan and so the partner might have a say in what happens.  Sorry but I didn't think it was that difficult a comment.

kinger101

It sounds like you're letting the tail wag the dog on this one. 

Madeinireland101

Brie said:

Madeinireland101 said:

Brie said:

Who says the kids will give the money back?

I trust my kids but it’s a formal interest free loan so that could apply with any loan so not sure what your point is. 

So it's a gift or it's a loan?  It can't be both.  You said it was a gift in which case you could plead to the kids "oh I'm desperate!!" and they could say no.  If it's a loan then they just need to make whatever payments are arranged legally.  So basically my point is what if the kids say they won't pay it back?  What if the kids have partners and are going through a split and then the money is their asset (not yours) as it's a gift and not a loan and so the partner might have a say in what happens.  Sorry but I didn't think it was that difficult a comment.

It’s a loan. Just like any other loan and it’s a loan where I won’t be charging them any interest. The point I’m making is that it’s a loan that achieves the same end result as if I had made a £10k a year gift out of excess income - but without the faff that you normally have to go through with HMRC (or at least the executor would have to do). At least a couple of people on the thread have managed to understand it.