Tax payable on business loan interest received?
Discussion
Hi, due to see accountants in a couple of weeks but hoping to get a little bit of knowledge from forum members before the meeting. I have a trust account, any monies going in to the account are exempt from tax. There is a lump sum in the account and then annual payments till I die.
A number of years ago I lent my Brother in Law £750k from the Trust account to enable him to complete some final works on a business he has and make the business a much more attractive proposition when it came to selling it, our solicitors drew up all the legal stuff and I had first call on all assets. He offered me a very generous (to my mind) 40% return on the £750k once the business, land (25 acres) and all assets were sold. The sale is due to complete next week and I have two questions.
1. The money I lent him plus the interest will be paid back into my Trust account am I liable for any tax payments on this?
2. This is probably a bit naive, but could the BiL (legally) avoid some of the tax he is due to pay on the sale of his business by repaying me a much larger figure than originally agreed? So for example, he sells for 12 million and gives me 4 million in to the trust account so he pays tax on 8 and not 12? Only looking for legal options.
Not sure if question two makes sense? Thank you to anyone that responds.
Regards
Morvan
A number of years ago I lent my Brother in Law £750k from the Trust account to enable him to complete some final works on a business he has and make the business a much more attractive proposition when it came to selling it, our solicitors drew up all the legal stuff and I had first call on all assets. He offered me a very generous (to my mind) 40% return on the £750k once the business, land (25 acres) and all assets were sold. The sale is due to complete next week and I have two questions.
1. The money I lent him plus the interest will be paid back into my Trust account am I liable for any tax payments on this?
2. This is probably a bit naive, but could the BiL (legally) avoid some of the tax he is due to pay on the sale of his business by repaying me a much larger figure than originally agreed? So for example, he sells for 12 million and gives me 4 million in to the trust account so he pays tax on 8 and not 12? Only looking for legal options.
Not sure if question two makes sense? Thank you to anyone that responds.
Regards
Morvan
LooneyTunes said:
It would help if you could be a bit clearer about this “trust account” and any relationship it has with a (presumably UK) Trust.
More specifically, is it the account of a Trust, or the account to which the Trust pays money to you as a beneficiary.
Thanks for your response LT, it is called a Protection Trust account. All monies are held in the one account managed by two trustees. The trust pays me money as and when I need it (via the trustees) Hope that answers your question??More specifically, is it the account of a Trust, or the account to which the Trust pays money to you as a beneficiary.
There can be restrictions placed on what a Trust can or cannot do. I wasn't saying the Trust shouldn't have made the loan - but the Trustees should check to make sure it was OK to do.
If it's the trust that made the loan, then interest paid by the borrower will be paid to the trust - and that interest income will have to be reported on the trust tax return.
If it's the trust that made the loan, then interest paid by the borrower will be paid to the trust - and that interest income will have to be reported on the trust tax return.
In addition to what Eric has put, it should probably have also been the Trustees who agreed the loan rather than you as beneficiary.
It also seems quite unusual that you have direct access to the money held by the Trust as normally the Trustees would be the ones who would release it to you in order to fulfil their responsibilities.
Please, whatever you do, don’t think (or let your BIL) think that bank accounts of the trust have some magical tax status. It would be unite easy for you all (including the trustees) to come unstuck. Well worth discussing with the Trust’s accountants/legal adviser.
It also seems quite unusual that you have direct access to the money held by the Trust as normally the Trustees would be the ones who would release it to you in order to fulfil their responsibilities.
Please, whatever you do, don’t think (or let your BIL) think that bank accounts of the trust have some magical tax status. It would be unite easy for you all (including the trustees) to come unstuck. Well worth discussing with the Trust’s accountants/legal adviser.
trickywoo said:
For the sums involved I’d be speaking to a proper tax advisor, quite surprised you don’t have one already.
40% return on £750k will almost certainly result in a very large tax bill for you unless there is some ‘offshore’ arrangement in place.
I don't think any offshore arrangements will cover the fact the OP had the authority to sanction lending the money ( if in fact he is in the UK) and any income will likely treated as his for tax purposes. If the Trustees are offshore, it's possible to kick it down the road but eventually somewhere, someone will be obliged to report it. Don't ever be under any illusion that your friendly accountant won't feel it prudent to declare matters to HMRC.40% return on £750k will almost certainly result in a very large tax bill for you unless there is some ‘offshore’ arrangement in place.
Of course it could be a UK settled trust and then I guess it will just be a case of tax at the appropriate rate. Given the numbers find a decent CTA who has experience in this and it might actually save you some money, the Solicitor is great for drawing an agreement but in all likelihood is not a Tax specialist.
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