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.

Trying to be slightly more constructive

• if their assets are exclusively 225k plus a house worth 250k then if they make you a gift after repaying, IHT is unlikely to be an issue
• have you got threshold issue with 100k like losing childcare or is this a wanting to avoid the 60% tax point?
• have they actually tried to get a loan themselves or have they just assumed they can’t? If they haven’t they should try a specialist broker
• have they tried renegotiating with the vendor - to pay an extra fee to buy themselves say 3 more months? Is this new home they are buying?

You are not technically charging interest, you are being charged the interest in the loan and asking your relatives to repay you that amount.

Therfore the interest you are being charged increases the loan to your family which you can request to be paid back to you as repayment of the loan. You are not ‘earning any interest’.

Have the relatives pay the interest directly to the mortgage company. It's really very simple. Interest is taxed on a received/receivable basis. If you don't charge them it, and don't receive it, there's no tax on you.

It’s the 60% tax point.

They can’t get a loan and the vendor won’t renegotiate because they agreed the sale last September (not a new build) with end Sept being the latest they would complete and the vendor is getting pissed off that they haven’t completed already. To complicate things further the vendor gave them free access to the property and they’ve been modifying it. (I know, I know. I have nothing to do with them 95% of the time and didn’t know. It’s only in the last couple of months that BIL has started asking questions and realised they’ve been fannying about with a house they don’t own while ignoring the one they need to sell. I’ve no idea how they thought this was ever going to sort itself out.)

DH has never taken a penny from them but his brothers owe PIL the best part of £100k but can’t actually repay that at this point.

What about the money for the extra Stamp duty as they will then own two homes?
Extra £15k but on the sale of their existing home, this can be reclaimed.
Why go to all the bother of the 'interest'?
You pay the mortgage. They repay you.
Then they decide they want to say thanks so gift you some extra at a later date.

Or is this tax evasion?

I think if you do declare, it's savings income.
Half each so interest on £3k @ 40% so will need to charge them £10k in total to cover the tax.

Charge them 11%.

55% of 11% is 6%.

It will cost me 60% in tax. I won’t be paying extra tax. They can make a gift to cover the interest separately. Or buy my DD a car or something.

The more you describe it, the more it sounds like a web of dreadfulness that they’re dragging everyone into. It sounds like the chances of them taking your money and not paying it back any time soon are quite high. If they haven’t even put their house on the market then they’re just taking the p*ss.

What would happen if you said no?

(And really sorry you’re being pulled into
this).

How did they exchange without proof of funds? or have you provided them with the commitment already?

If we say no then they can’t buy the house, they lose £30k deposit and risk being sued for the work they have done on the house before it’s theirs. And they would have to stay in their home which is fast becoming an issue for MIL whose mobility is decreasing by the day (new house is a bungalow).

And yes, it’s an utter clusterfuck. DH is determined it will all be fine. I gently (but firmly) advised him last week that if we do do this (still a massive if), and it goes wrong (ie money isn’t back and interest covered in full within 12 months) we will be evicting them to sell the house and I don’t care if that rips the family apart.

They told the sols they would be selling their house and showed evidence of the shares and savings they had. They had agreed a year between exchange and completion (and then pissed it up the wall).

By creating an interest income stream you are going to create a tax liability, whether you want to or not. At a very basic level, to ensure that you end up after tax with enough income to cover your interest cost you’ll need to divide the interest cost by 1 minus your marginal tax rate expressed as a decimal (assuming that this interest income doesn’t mean you cross tax thresholds). So for a 5% interest cost to a 40% taxpayer you’ll need to charge 5/(1-0.4)=8.333%. But as it’s going to take you > £100k then that needs to be 5/(1-0.6)=12.5%

Please re-read my posts. We won’t have them pay the interest. They can give DH early inheritance or buy DD a car for the equivalent of whatever the interest costs are later on. Ergo no tax liability.

it’s too late for me to reorganise my finances to stay below £100k and I’m not going to tip over that due to their fuck up.

Firstly you could reduce the income tax liability by you and your partner making some additional pension payments for 12 months.
Secondly if you're going to put a charge on the property, is this the new one or the old one? Because if it's the old one and they've sold it that becomes more complicated.

The charge is (obviously) on the new property. Because we are only going to be lending the money if they buy it.

We can’t reduce the tax liability to 0% by any means so we won’t be charging them the interest formally. Can that please be the last time I say that?

Are they in England? If so, are you sure they have exchanged? The solicitor would normally need to see either sufficient cash, a full mortgage offer or exchange of contracts on another property. Not just ‘have a house and will sell’.

And again, you are not charging them interest. You are making a loan to them of an amount that includes the interest you are being charged. You don’t earn the interest, the bank does!

Yes. They have exchanged. SIL has seen the paperwork. Believe me, none of this would be being discussed if they hadn’t.

I don’t think it is treated that way when not a business, ie, as a person I can’t offset the cost of the loan as an expense. So get taxed on the interest if we charge it.

This is such a risk. 12 months is nothing really and they can't hold out for the full asking price.

You wouldn't really evict them after 12 months would you. It would be, let's give it another 3 months, then another 3...

No, DH has agreed no extensions as we will need the money for other things. They don’t need the full asking price. And DH’s view is that if we are enabling them to move house, the £30k they aren’t losing by pulling out can be lost on the house price if necessary. (So a “we buy any house” company if all else fails.)

You're saying that he is only doing this because of his FOG but that same FOG would allow him to force his parents out of their home? I don't think so. He would never do that. He might say he would but when it comes to it the FOG would prevent it.

Maybe he should get some therapy so that in 12 months time he's better prepared to face that scenario.

are you going to ever see that money again OP? What a nightmare

They have had 9.5 months already. They have 2.5 months before completion. And 12 months after that. So fuck screwing out DD’s opportunities and own house renovation needs which will be severely impacted if they manage to fuck this up any more. They’re moving a few houses away from golden child BIL who owes them upwards of £80k himself so they can go and live there if we have to force the sale of the new house.

(DH has just mentioned that his father told him inheritance was being split equally despite huge discrepancies in who has had what over the years. They covered another BIL’s rent and legal costs for a parenting court order (£50k+) and paid the deposit on 4th BIL’s house after he married for the second time (£40k). I have told him to leave me alone so I can work out how to illustrate to him what a fucking doormat he is. This isn’t about inheritance - we have had and want nothing from PIL - but the utter entitlement of expecting us to cover the costs of their monumental fuck up because of the money they have spaffed on the others and will never see again. I am absolutely furious and withholding all agreement/signatures etc until further notice.)

And DH’s view is that if we are enabling them to move house, the £30k they aren’t losing by pulling out can be lost on the house price if necessary. (So a “we buy any house” company if all else fails.)

In that case, it would be simpler and more straightforward to just lose the 30k now without involving you surely?

In any case, we buy any house won't be 30k under, 150k under more like. They make an offer and their small print ties you in with a big penalty if you change your mind and then just before exchange they reduce their offer massively to about 50% of the property value. If you don't agree and pull out, they claim the massive penality that you've signed up to. Wouldn't touch them OP.