Interest and tax on a bridging loan - complex situation

[FinancialConundrum]

Just wondering if anyone has dealt with a similar situation and can offer some advice.

We (DH and I) are likely going to have to provide a significant bridging loan to a family member in the next few months. They have committed to the purchase of a house (exchanged and completion date agreed) some time ago but have not yet sold their property. Time is ticking and we have the ability to withdraw against our mortgage to the original loan amount. We are having legal documents drawn up to put a charge on the new property to secure the loan.

Where I am confused is in relation to interest. The legal paperwork sets out that the borrowers will cover any interest changed on the amount they are borrowing, and we are not charging anything on top, but I’m not sure where this leaves us in relation to personal tax. Advice pages refer to interest in the sense of charging for lost savings interest or to ensure the borrower understands the seriousness of the arrangement.

So, how would any interest payment be treated in this scenario? The intention is that the loan is repaid in full when the property is sold, but as there is no clear indication how long this will take, we are likely to incur interest on the loan which we do not want to have to pay or to pay tax on. Our lawyer doesn’t provide tax advice.

Any thoughts welcomed.

If you provide a personal bridging loan to a relative and they repay both the principal amount and the interest then the principal replacement is tax free. But any interest you receive is treated as taxable income by HMRC. However whether you pay tax on it depends on your situation (eg you may not earn enough). Have a look at Money Saving Expert https://www.moneysavingexpert.com/loans/lending-money-to-friends-family/

You didn’t ask about this part - but absolutely no way would I risk my property for someone else’s bridging loan. You could end up homeless.

I don’t really want to talk about how this has come about - it’s an absolute clusterfuck of massive proportions.

Both DH and I manage our income to stay just below £100k taxable earnings, hence I really don’t want any additional tax liability (but I also don’t want to be covering a c6% interest charge either).

There isn’t really a risk to our home. We have less than £10k left on the mortgage and around £450k in equity. If they defaulted on the loan DH and I have been clear we would force the sale of the relative’s house. We’re setting a max 12 month repayment term.

You need to speak to a tax expert.
What you need to know is probably beyond the expertise of those on this board.

The interest issue is that it is the interest charged by the bank rather than us charging interest. If we were a business that would be an offsetable cost, but as a personal loan it seems it wouldn’t.

Where would I find a suitable expert?

Can you ask the person who deals with your personal tax affairs?

You'll be liable to income tax on the interest you receive with NO offset against the interest you'll be paying, so you will suffer income tax. What you need to do is get the agreement with your relative to include an extra charge to cover the income tax you'll suffer which will be a complex calculation as the more they pay, the more tax you'll pay, so a kind of "circular" calculation, but a decent accountant/tax advisor can set up a formula to get it right.

That would be me……..

OK, so are you a qualified accountant?

I have accounting quals but am not qualified. I don’t need to be given I am PAYE and only need to deal with pension conts, charitable donations, dividends etc. My tax return is pretty straightforward
so I don’t need to pay someone else to do it.

You say it's a complex situation. But then you say you don't need to pay anyone else to do it.

So either you can deal with it or you can't.

If you can deal with it fine, if not, you'll have to pay someone with more expertise to do it for you.

So I don't know what the actual problem is ?

Is something lost in translation?

I was advised I needed specialist tax advice.
I asked where I would find a tax specialist.
I was asked who usually deals with my tax.
I said me, because it’s not usually complicated. So I don’t need to pay someone to do it.

This is complex. I agree I need (and would like) specialist advice. I’m not sure what the best route is to find the right specialist advice.

Does that make more sense?

Google "tax specialist" plus your area and call some ?

No need to get snippy.

If you are an accountant then surely you have access to people in the same occupation who can advise you?

Surely accountants have a professional organisation that deals with these issues?

Are you taking out a standard mortgage on your property and passing that money on to your family member so that they can buy their new house, is that correct?

Any reputable High Street accountant can deal with this. It's not really specialist and it's not rocket science to crunch the numbers to know what to put into the contract to ensure that your tax liabilities are paid for by the borrower.

Can your family member not just pay the interest on the loan directly to the loan company if you’re not charging anything on top?

You’d have to trust them to do so but as you are willing to lend them a significant amount of money, I am assuming you do.

So is the position that you are taking out a secured loan of (say) £100k at 5% annually, which is being lent to another family member who will pay you interest of 5% annually? If so, you will have to report the interest received from family member to HMRC and pay tax on the £5k in the above example.

I can’t think of any reason you would be able to net off the interest received against interest paid in the circumstances.. however, this is off the top of my head and I’m happy to be corrected.

I guess it depends on the figures involved but would be worth taking specific advice on. I would ask your solicitor if they have local accountancy firms they would recommend.

Or you charge them the interest and add 60% which would be your marginal rate of tax on this interest,as it takes your income over £100k. Or an extra 40% on top if that £100k is split between two of you.

I’m very much typing as I’m thinking so others might disagree or spot things I’ve missed so these are ideas to look into further rather than accounting advice.
But, if you haven’t used your ISA allowance this year, could family member pay the interest into one for you?

Where did I say I was an accountant?!! I’m not anything of the sort!

You’ll potentially be taxed on any interest income and likely cant offset any interest expense. So yes you’ll potentially lose personal allowance etc by going over £100k. Please take tax advice.

We already have the mortgage, we can just draw funds off it. It’s not a new mortgage.

But yes, temporarily passing that to the family member to allow them to meet their commitment on another property.