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.

it’s an option, but that leaves MIL in a house she can’t really
live in as she is not far off not being able to navigate stairs safely.

I’ve found a “we buy” firm that don’t do that. Have checked out trustpilot etc. They could afford to drop a fair bit to get the next house. They would have to take the hit on their savings.

Is there any chance something else is going on behind the scenes? It all sounds quite fishy: BILs who owe them tens of thousands; them doing works on a house they don’t own but ‘not managing’ to put their house on the market; a SIL who’s ‘seen’ evidence of contracts exchanged despite them not having funds to proceed; needing a bridging loan but STILL not having a home ready for sale.

I hate to say it, but this is starting to scream ‘scam’ to me.

It is all true. I have no idea how, but it is.

You really need to consider your plans properly.

Just because you have a charge over a property, doesn’t mean you get to evict the owner if they don’t repay you. The charge on the property only ensures you get paid back when the owner decides to sell.

Really? That wasn’t my understanding of it. FFS.

surely they can get their own bridging loan against the value of the house

I am told that this isn’t possible.

Well I think what you’ve been told is incorrect….

They have a house so they can borrow against it. If they can’t pay it back the bank can force the sale of the house but you definitely can’t!

I think they’re having you on OP. They don’t want their own loan and think it would be easier (for them) if you just gave them the money instead

Just google tax advisor near me, there is one on most high streets it’s not complicated.

you seem more interested in venting on your in laws and going on bizzarely about how much you earn.

We’ve rather moved past that.

New research starting now.

I am so fucked off with them.

And DH.

I’m not surprised OP

I think you’ll only more fucked off if you go along with the scheme though!

Older people release equity all time remember

I want to message other family members but I don’t have their numbers…….

(DH is working away, hence messaging)

call a mortgage broker and see what they say

All this sounds really dodgy to me. Only hope? I think not

Yes. I’ve been far too passive and trusting on this. I’m riled up now though!

They could afford to drop a fair bit to get the next house. They would have to take the hit on their savings.

Again, if they can do that, why not just take the hit on the 30k now without involving anyone else if they're going to lose at that amount anyway?

Well it could be possible to become a 'Sole Trader' then, and put the interest payable down as expenses, and the interest you receive as income.
Net profit = zero.

My suggestion would be to take advice from a tax specialist at an accountancy practice. You could also ask if you can offset their fees as expenses lol.

Again, because MIL really needs to move to a bungalow.

But your DH has their numbers? There's no way I'd be doing this without proper conversations, in person. Your DH is railroading you because he feels like he needs to fix things for his parents.

It may well be true, but that doesn't mean you have to do it without being fully satisfied that it's the only option.

But she’s estranged from them. Would you give £100k to someone you’re estranged from and take it just on trust they’ll pay it back? This is a recipe for disaster.

I would absolutely not be doing this but instead enabling them to make their own arrangements. I’d be visiting them with a mortgage broker to discuss all their options in full.

if you are going to do this (don’t) you should at least have a financial contract signed, no idea how that works.

Why are you estranged?