Loaning/gifting money

[JapanRed]

Hi all,

This is quite simple but equally quite complicated. We are potentially looking to move house. Budget is £900k. A house has come up at £1.1M. I suspect it’s too expensive but it’s probably the dream bucket list house. Two sets of parents have offered to lend/give £200k (£100k each) to bridge the gap. I don’t want to just take the money, but equally it can’t look like a loan (I don’t think) as I would have to declare it to mortgage which will likely mean we can’t borrow as much.

We can quite easily afford the repayments on a house at £900k as we have almost paid off the house we currently live in; we wouldn’t be stretching ourselves too much.

I have a limited company which makes approx £150k per year profit. Could each parent buy into my company (shares?) for say £100k each? And I pay them back gradually via dividends? I usually have £100-200k in the company as it’s hard to take it all out without getting stung on tax, but I could give them the dividends. When the £200k is repaid (plus interest) they would sell me the shares back at £1.

All this is “in theory” at the minute, as I’m not really sure I feel comfortable a) buying such an expensive house and b) lending money from parents.

Thoughts? Obviously don’t want to do anything illegal or even dodgy.

Thanks.

[bristolbaron]

Maybe I’m missing something stunningly obvious, but how are you going to get their investment into your personal account without it being a taxable income?

[JapanRed]

bristolbaron said:

Maybe I’m missing something stunningly obvious, but how are you going to get their investment into your personal account without it being a taxable income?

great point and one I’ve not thought of. I’ve never sold shares before so all this is helpful. Would the £200k be classed as income then, and be taxed accordingly? No way to avoid it?

[akirk]

take it as a gift - no issues then with mortgage
presumably as long as they last another 7 years you won't be hit by IHT but you should allow for that possibility

alternatively - could they be part owners of the house?

[anonymous-user]

akirk said:

take it as a gift - no issues then with mortgage

The money will almost certainly need to be properly documented as a gift and copied to the mortgage company to keep them happy - which means it's difficult to re-characterise it as a loan after the event. If you receive a gift of £100k there's nothing to stop you gifting it back again in due course, although this will unfortunately mean both parties have made PETs. (Effectively using up £100k of their tax free IHT allowances for the next 7 years.)

[Sarnie]

akirk said:

take it as a gift - no issues then with mortgage
presumably as long as they last another 7 years you won't be hit by IHT but you should allow for that possibility

alternatively - could they be part owners of the house?

"take it as a gift"

^This.

"could they be part owners of the house?"

^Not this..........can't be part owners without being on the mortgage too......

[Sheepshanks]

PHers never cease to amaze me - someone who can comfortably afford a million pound house doesn't know the difference between lend and borrow.


Anyway, as a parent I've been on the other side of this a couple of times - not to this scale though - and it had to be done properly and I had to sign that it was a gift. There were mumblings from the kids about paying it back but of course that's never happened and my wife would just spend it back on them anyway.

I hear the comments about potential IHT issues, but I do always wonder who would know several years down the line?

[Eric Mc]

A loan implies repayment. A gift has no repayment.

It's not complicated.

Gifts are subject to Inheritance Tax if the person making the gift dies within 7 years of making the gift.

[anonymous-user]

Sheepshanks said:

I hear the comments about potential IHT issues, but I do always wonder who would know several years down the line?

When HMRC ask for copies of the deceased's bank statements all the executor has to do is have a satisfactory explanation for the payment of £100,000 made to son Jimmy which hasn't been mentioned in the "lifetime Gifts" paragraph of form IHT 400. Hmmm....

[JapanRed]

Thanks all I think it’s a no go anyway. I’m not comfortable being gifted £200k, especially since £100k would be from my wife’s parents. I would much rather be loaned the money and pay it back over time, which wouldn’t sit will with mortgage company.

I guess I’m just stubborn in that I’ve never had a penny that I’ve not earned the hard way, and don’t really want to start now.

Cheers for the responses.

[Robertj21a]

Sounds like just the scenario with plenty of potential for family problems in years to come.

[Sarnie]

JapanRed said:

Thanks all I think it’s a no go anyway. I’m not comfortable being gifted £200k, especially since £100k would be from my wife’s parents. I would much rather be loaned the money and pay it back over time, which wouldn’t sit will with mortgage company.

I guess I’m just stubborn in that I’ve never had a penny that I’ve not earned the hard way, and don’t really want to start now.

Cheers for the responses.

Find a good mortgage broker then, so you don't need parental money

[Sheepshanks]

rockin said:

When HMRC ask for copies of the deceased's bank statements all the executor has to do is have a satisfactory explanation for the payment of £100,000 made to son Jimmy which hasn't been mentioned in the "lifetime Gifts" paragraph of form IHT 400. Hmmm....

I've been an Executor a couple of times and never been asked for details. With that sort of amount likely the deased would likely have money in multiple accounts and it'd be easy to close some and the Executor wouldn't even know. Was a bit of a nightmare with my Mum - she must have had 20 accounts of various sorts, and that wasn't even for a huge amount of money.

[JapanRed]

Robertj21a said:

Sounds like just the scenario with plenty of potential for family problems in years to come.

Indeed

[Sheepshanks]

JapanRed said:

Thanks all I think it’s a no go anyway. I’m not comfortable being gifted £200k, especially since £100k would be from my wife’s parents. I would much rather be loaned the money and pay it back over time, which wouldn’t sit will with mortgage company.

It must happen all the time in families - just take it as a gift and pay it back.

[JapanRed]

Sarnie said:

JapanRed said:

Thanks all I think it’s a no go anyway. I’m not comfortable being gifted £200k, especially since £100k would be from my wife’s parents. I would much rather be loaned the money and pay it back over time, which wouldn’t sit will with mortgage company.

I guess I’m just stubborn in that I’ve never had a penny that I’ve not earned the hard way, and don’t really want to start now.

Cheers for the responses.

Find a good mortgage broker then, so you don't need parental money

Can you recommend anyone Liam?
In all seriousness we will be using your services again when we find the right house. Unfortunately I think £1.1M is probably just a bit of a stretch too far.

[Happy Jim]

JapanRed said:

Thanks all I think it’s a no go anyway. I’m not comfortable being gifted £200k, especially since £100k would be from my wife’s parents. I would much rather be loaned the money and pay it back over time, which wouldn’t sit will with mortgage company.

I guess I’m just stubborn in that I’ve never had a penny that I’ve not earned the hard way, and don’t really want to start now.

Cheers for the responses.

I was in the same situation and mind set as you a few years ago, stick yourself in their shoes though and view it from the other end. If they have no obvious need for it and it's going to come to you anyway then all they are doing is sound & prudent tax planning, plus there is a massive parental feel good factor in helping your sprogs into a nicer/better place etc. Suck it up and take the gift :-) just don't piss it up the wall.

The help we got from our parents years ago has meant that we are now in the same position with our kids giving them a healthy lump sum to kick start them onto the property ladder years before they otherwise could (and 1 set of Grandparents are still around and now seeing that flowdown in action which gives us a "fluffy glowy feeling" that we've been responsible).

Alternatively....Just call Sarnie ;-)

Cheers

Jim

[JulianPH]

Providing you have owned your business for two years of more you could sell some of your shares in your company and claim Entrepreneurs' Relief, resulting in just a 10% tax bill of £20k.

Alternatively, I understand you not wanting to to take a gift your your in-laws, but what is to stop them giving the gift directly to their daughter to do with as she wishes and without your being involved.

I take it she will be on the mortgage/deeds anyway?

Your wife can then make gifts back to them directly and you do the same with your parents.

[OMITN]

I've been here (still here).

Financial crisis and FIL gets properly jumpy about banks going under (he was one of those queuing outside Northern Rock to extract "a house's worth" of money.

I (foolishly) agreed that they could pay off part of our mortgage and that we would then repay as an interest free loan (they took a second charge) in parallel with our mortgage payments. The mortgage company were completely fine with this. We're still paying (8 years at the current repayment rate).

When we remortgaged a couple of years ago this arrangement was still fine for the new mortgage company. They have subsequently decided to give up their second charge, so now it's just an unsecured loan

Why foolishly? First, they never wanted to document anything, which I'm not comfortable with - if I split up with Mrs OMITN then I've largely got only their goodwill not to make me repay on demand. Second, they have used it more than once as a moral hold over us and our home - that's far worse than the arms' length relationship one has with a bank.

My advice: if you're all up for it carefully consider whether an interest free loan would work better than a gift (and whether the loan won't be deemed to be a gift anyway). And if you do go ahead with anything, get something in writing....

[NickCQ]

Obvious point but depending on your area £1.1 mm ask might translate to a lot lower selling price. Don’t forget the 10% top rate of stamp duty though.