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.

At 14.54 you said "I have accounting quals but am not qualified."

Maybe that got "lost in translation" 🙄

I don’t want tax liabilities, ideally.

I do have accounting quals. I have studied accounting to a point but then took a different path and do something completely different now.

I also studied A level Art but I’m not Picasso.

You will pay tax on the interest earned from the borrower Tax implications and family loans | Private Client Tax - BDO

Thank you - this is helpful. The solicitor is hundreds of miles away (as I said, absolute clusterfuck that I wish wasn’t happening) so I’ll have to find someone local.

But the advice seems pretty definitive - any interest charge has tax implications that we would prefer to avoid if possible (but I need to find another way for them to cover the interest because I’m absolutely not covering it).

Are none of my ideas worth pursuing?

Sorry - had some meetings and was giving this some thought. I’m keen to avoid anything which might lead to a HMRC investigation.

But they could potentially make a gift which at least covers the interest once the balance is settled. Would just have to hope they outlive the IHT period.

The difficulty with a gift is that, in order for it to be a gift, they have to be completely free not to make it. Whether that will work will obviously depend on your relative, but you need to be careful to make sure that it is a genuine gift and not a disguised payment of interest.

How much is the interest going to be? Depends on your other financial arrangements but could you structure repayments so that capital is payable as it falls due but interest is payable over a longer period, so that it stays under your personal savings allowance?

Roughly £6k if they take a year to sell and repay. We hope will be much quicker, obviously.

It’s actually DH’s relatives who are absolutely mortified that they have fucked this up so badly. So I’m trying to deal with DH’s tendency towards FOG (he said he’d stick the interest on his tax return and pay 60% if needed - absolute wombat) and kicking very distant relatives up the arse to sort themselves out when I really just want to say they can deal with it themselves.

They’re too old to get a mortgage and have cashed in everything they can, but have taken 9 months to get their house on the market (and it still isn’t) with an agreed completion date for the new house of 30th Sept. 🤯

needless to say I am deeply deeply unhappy about it and have been torn between trying to get them to sort it out and issuing divorce papers to DH.

A bridging loan can get really complicated and should be avoided, sell their place first, if you went to a bank they would want a minimum fee, plus interest at a high rate. You mention an advance up to original value say £400k interest plus fees is going to be £30K+ for a year

Have you actually asked your building society if they will give you an advance for this purpose? That should be the first step

It would be much better for the house purchaser to go to the bank for the bridging loan, without a guarantor they will probably say no, so you guarantee it if it goes wrong, then there is no issue of taxation or interest you pay. ( unless it goes wrong)

Crossed wires I think

you say £6K would cover interest for a year, is that the value of the house being purchased.? You are advancing them less than £100K.

We would be advancing them £100k against a £300k house. Interest rate is c6% (currently).

They can’t get their own loan or mortgage as they are in their 70s and retired.

They have to complete on 30th Sept or lose £30k deposit plus other costs. Their house is not yet on the market. There is next to no way they will have sold it in time to meet the deadline.

House they are selling is worth at least £250k so it’s a low risk loan in that regard, and it’s being secured with a charge against the house which we will enforce should the money not be repaid.

So incredibly mortified they are taking no real steps to rectify it by putting their house on the market as a matter of urgency?

And a DH who is so deeply in the FOG he will remortgage his own home for distant relatives? Don’t believe for a second he would be willing to enforce security over these people.

no way would I put my financial future on the line like this. Their clusterfuck will otherwise become your clusterfuck. Sorry Op but this is a very bad idea.

If you are advancing them £100K on a £300K house where does the other £200K come from on 30th Sept

They are putting the house on the market but it took forever for them to choose an agent and the photos and energy assessment are going to be another fortnight.

They are not distant relatives family tree-wise. Distant as in hundreds of miles from us. And he knows he is putting everything on the line even suggesting this.

They have liquidated everything they have and have £225k in cash.

We are all incredibly stressed by this. And I’m doing everything I can to get them to sort their shit out themselves but we are estranged (DH isn’t) so having to do everything through him.

Except he needs my signature. So he has to listen.

As you say it's a mess but low risk dont stress about it, if your husband is relaxed about it go with the flow tax on £6k is not the end of the world. If your income is £100k it doesnt really matter.
My son messed up badly on his wedding and I had to bail him out so I know what it's like.

Nobody is relaxed about it.

And having to pay 45% tax on £6k is a big deal to me. That’s the best park of £3k spent on fuck all, and out of our DC’s mouths. I don’t work as hard as I do to earn what I do and to keep my taxable income below £100k a year for PIL to fuck that up, thank you.

If they hadn’t spent the last 50 years lecturing DH on financial responsibility it might be slightly less annoying.

So you’re estranged, so their behaviour has presumably been such you can no longer bear to be in contact with them? And yet they expect you to lend them 100k borrowed against your own house? Nopey nopey nope.