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.

But this isn’t the point. She can still move without anyone else being involved. Either a fire sale and accept less money for it or release their own equity for a bridging loan.

Don't be rushed into anything.
You need much more time to think about it.
It sounds bonkers and very risky to me and there will be a more straightforward solution available for your MIL where she takes on the risk of the loan, as she should.

I absolutely won’t be driving 5 hours to take them to a mortgage broker, thank you!

I may well refuse the request to lend them money.

Fair enough. In that case I definitely wouldn’t be handing them 100k

Your husband is either having an absolute collapse of mental abilities under the FOG, in which case you can’t trust him to make this decision right now, or he’s stitching you up like a kipper.

I am sorry for your MIL. That doesn’t change that they’ve made a series of extraordinarily stupid decisions.

As someone else has said, you can’t force them to sell with a charge. Your £100k may be safe when they do sell, but you’ve no ability to enforce them to sell and it doesn’t sound like they have any intention to do so.

If they can’t get a bridging loan, there has to be a mathematical reason as to why. There is a detail you can’t know, or they don’t want one as they know they can’t or won’t pay it back and would rather borrow from you.

I’m sorry you’re in this situation. If DH put me here and wouldn’t budge, he’d be loaning them out of his side of the equity post divorce.

There are companies who will buy houses in this timeframe op. Granted, they will charge a fortune and your in-laws won't get anywhere close to the value.

Worth a conversation about losing out £30k they've already committed Vs using one of these companies?

That's the consequence of them fucking around with their sale, they're now finding out that it's going to cost them ££££. What if you lost your jobs and couldn't repay the loan yourselves?

I can't understand why they wouldn't be able to get a bridging loan. Can't get a mortgage, absolutely, makes perfect sense.

But a bridging loan, secured on a house? No reason at all why they wouldn't be able to get one. Unless they have not not enough equity on the house they are selling.

Frankly if they aren't a good enough risk for a bank to give them a bridging loan then you doing it is really not a good idea.

There's companies that specialise in 'bridging loans for pensioners' - them being retired is irrelevant. If they really can't get one then there is some other reason. Or they're lying about having tried/being refused.

I'm not an expert at all, but I think you could potentially force a sale if you were on the deeds as a co-owner. But you'd need a court order, you can't just do it. That's not something I'd be relying on at all.

what is FOG?

I’m also here thinking is this actually an elaborate financial abuse situation. It’s so nutty and someone is lying along the way.

Fear Obligation Guilt

thank you

Yes, I mentioned upthread that I have been pushing this.

My job is more secure than DH’s, but nothing is certain. DH is convinced everything is fine but isn’t thinking about the worst case scenario. (“I know this sort of stuff tears families apart if it goes wrong.” “I couldn’t give a toss about your family, but DD and our security is everything to me.”)

Have been advised by sols not to go on the deeds as would raise a CGT liability if we did.

DH has given me the solicitor’s details. I’ll be emailing them later today. I think he has realised I’m not just going to go along with this.

I wouldn’t touch this with a barge pole.
I might be way out here but it sounds like your DH has “Golden Child” siblings and he’s tried (and probably failed) to try and reach that level himself. He’s convincing himself that if he does this one thing for his parents then he’ll be promoted to GC status. But with people like this the one thing is just never enough, they’re a bottomless pit.
What your DH needs is a bad guy who is going to take the decision out of his hands completely, so in effect he’s got no choice but to deny his parents just this one thing.

If you’re estranged from them already then step up, be the bad guy, and make it absolutely crystal clear that this scheme is not going to happen.

You only pay CGT if you make a profit and you have I think a £6k allowance together before you pay anything at all. So the liability is small. Not that any of this is a good idea.

do you know the solicitor? Do you/they have a financial advisor?

DH knows the solicitor. (They are local to the property.)

None of us have financial advisors currently. We haven’t needed one since we set up a company c15 years ago.

This sounds exhausting, OP. I wish I had some useful advice but all I can say is that it sounds like your instinct to be the cynical one here is well-founded. These do not sound like sensible people, and it doesn't sound as though their financial literacy is good enough to be entering this kind of agreement at their age frankly. Best of luck.

I am pretty sure that they can get a bridging loan. Bridging loans repayment method is the sale of the original property - so income is largely irrelevant. The lender will care that there is plenty of equity such that even if it needs to be sold at a significant loss or after a significant amount of interest has accrued, they will be paid in full - which it sounds like is fine if they need £100k and have a £250k property to sell.

They can be structured so that the interest rolls up into the final payment - ie you don’t pay interest monthly, it builds up and you pay it all off at the end.

This won’t be cheap borrowing! But maybe that will help focus minds on cracking on with the sale….

This sets it out pretty clearly https://ukpropertyfinance.co.uk/bridging-loans/types/bridging-loan-to-buy-a-house/

i suspect it isn’t so much ‘can’t get a loan’ as ‘don’t want the risk and high cost of taking out their own loan’

She can still buy a bungalow. Just not this one. They can do what everyone else does, get their property on the market, secure a buyer, look for a suitable house/bungalow, put in an offer and start the buying process.

Why can't they just do it the normal way? Losing the 30k is irrelevant now because you've realised that they would lose that anyway by having to take the hit on their sale price.

I would just withdraw from the whole thing, say you've looked into it from every angle and it's too high a risk for your own financial security so you are unable to help them.

I mean he says that now, sure. But it will be “we can’t make my parents homeless for the sake of a few months”. and on it will go.

Even if he is willing to enforce a sale it will take months to get to court, they may get given more time and then of course it takes time to get the house sold plus of course cash to enforce all this. So it could be another year easily before you get the original cash back.

Have they at least got a timetable to get the property in the market?

Have been chatting by message to sensible and closest to the PIL BIL all afternoon. He’s stressed to high heaven with it all
and is concerned about the marked deterioration in PIL health. I’ve basically said that I’m not convinced they have done everything they could to try and sort this out and that’s the least I can expect when they are expecting us to cover £100k for a fuck up of their making.

He says they got turned down for a £20k loan, but doesn’t know what type. I’ve pushed that they need to go to a mortgage broker and see properly whether a bridging loan is an option.Yes, expensive but considerably safer for their children and grandchildren, and there should be more than enough equity.

The estate agent took the photos last week and the energy survey is being done this week. So it should be on the market next week. In the space of one text discussion it went from “so you should get your money back a couple of months after they move” to “within 8-12 months based on 6 month average sale time”. I’ve pointed out the political and economic uncertainty in the current climate and that they bought the house new 52 years ago and who knows what a homebuyer’s survey will report. (They still have the original bathroom and kitchen.)

I’ve sent links to fast home buying companies and made clear my expectations that if there isn’t significant interest in the house in the first week of being on the market, I want them contacted.

He has tried to reassure me and is definitely laying it on thick that if we withdraw they can’t move. I’ve pointed out that these aren’t my parents, and that this might all go to plan and in a year’s time I’ll wonder what I was worried about, but I am absolutely not prepared to sacrifice our own security, home improvements, educational or travel opportunities for DC without them proving to me that a good outcome is more likely than a bad one. Because they really don’t want to see me in full fight mode.

Possibly a bit harsh, but it needed to be said.

I don't know why you are engaging with wider family. Your personal financial decisions are nothing to do with them. By pointing out the pitfalls all you are doing is inviting them to argue against you.

Just say, we've looked into it and we're not in a position to provide financial help. If they require other practical help I'm happy to point them to services that may be able to advise.

That's it.

As long as you keep engaging and discussing, this will drag on and on. It's a taste of what it would be like if their house didn't sell or they declined low offers, or they refused to use fast home buying companies. You would have no say in this and no recourse except for expensive legal routes.

I think you are making a huge problem for yourself for the sake of 30k. In fact, it would be cheaper for you to just get a solicitor to draw up an agreement where you give them 30k now and they pay it back when their house sells, whether that is 6 months, 12 months or 12 years.

It’s broader and more complex than that.

Absolute madness, sorry OP

I know. <sigh>

BIL keeps saying “we’ve sleepwalked into this” and I keep saying “no we haven’t”.