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.

I think if you lend this money you have to fully expect never to see it again

This is entirely the point I have been making.

Not having access to that money for even a year causes issues as we won’t be able to do the home maintenance etc that we need to do. Longer than that and it starts impacting DC’s access to university or other education, and frankly, having planned to be mortgage free by 50 (and using the mortgage as needed for other things), the thought of going back to almost the start for someone else is psychologically disturbing. I want my 50s to be the start of renewed freedom and the ability to wind down a bit. I don’t want to have to work till 70 to fund a house I have nothing to do with.

And because they have dragged their heels for over 9 months (you can literally grow a human in the time it’s taken them to instruct an estate agent) it’s somehow now all on us to bail them out while they don’t do anything to try and avoid needing to.

Unfortunately, I think DH has been dragged into this like the proverbial boiled frog and hasn’t had the ability to look at things dispassionately (or passionately, in relation to his nuclear family). He has a huge amount of guilt even now for moving away for uni and then work and doing well and isn’t emotionally attached to money - he can always make more. He’s just not looking at the impact on us if it doesn’t go to plan. This is the first time he has seen his dad be so vulnerable and scared and he wants to help them. They do need to be nearer to sensible BIL for lots of reasons but I’m not prepared to take all the risk of enabling that when they haven’t explored all angles.

So really the only battle you have is with your DH. He is being swayed by his family.

The only question really is would he go ahead and do this without you.

Well, he knows he can’t. But we have had an understanding for the best part of 15 years that I have as little to do with his parents as possible (there is history, as I’m sure you can sense).

Which works just fine when there is 5 hours between us and he’s just seeing them occasionally. But now all of this is bringing up so many issues that he has - guilt at having moved away, obligation of being the eldest (and most responsible) and making them proud, fear of them declining in health and being uncomfortable and them not being around forever. And now this has been discussed for months with them and his siblings, he will feel it’s all on him whether they get to live out their lives with BIL and SIL a few doors away without worry about stairs and will never forgive himself if he doesn’t make it right. (I may not have said before but he is autistic and re-lives events from primary school where he feels he said the wrong thing etc. I don’t want to create agony and turmoil for him but have to spell out the very real risks if this goes any more wrong.)

So they're putting pressure on him and he's putting pressure on you. Someone needs to break this cycle before your DD is also affected.

He wants you to ease his feelings of guilt but he can only do that by making you feeling guilty. That's not a gift given freely, that's a sort of blackmail.

They are too flakey for gifting to be safe. Someone suggested gifting an ISA (so tax free). But doesn't your ISA have to be paid in by you or it gets closed as non-compliant? The whole thing is too risky. Between HMRC and the banks you are already vulnerable because of the £100k cliffedge and your mortgage. They have fucked up their own circumstances. Get involved and they will fuck yours up too. The advice and structuring needed to protect you could well cost thousands.

Reading this and I just can’t make sense on how they’ve managed to exchange on their purchase without selling their own house first. Not to mention the long gap between exchange and completion is so risky as anything could happen. Why on earth did they do that on not so the selling/buying a house the usual way?

I was wondering whether the OP had been hoodwinked on this, to increase pressure...

Firstly, this is a family who do not have a single “good communicator” gene amongst them.

The golden child sibling moved to a village about 45 mins from the family home around 18 years ago and had a family etc. PIL did all of their childcare for about 8 years and would stay over to do so, so they became part of the community as well. BIL found out this bungalow on their street was coming up for sale and suggested to the seller that they see if PIL were interested in it before putting it on the market. PIL agreed it was perfect but were concerned about how long it might take to prepare their house for sale and sell it. The owner was moving in with family on the other side of the country and wasn’t in a hurry to sell, but didn’t want to risk the sale then falling through. So they came up with this plan that they would exchange with a year (max) for completion and PIL would keep an eye on the place, mow the lawn etc. Tickety boo all round. They used a solicitor that one of the sibling’s employer uses and paid the deposit and somehow the legal docs were signed. PIL then asked if they could do some minor work to the property (boarding the loft, fitting a better ladder, having a shed installed in the garden) and if they could start emptying their garage into the new one etc. I think they got so distracted by the sparkly new thing that they forgot they needed to sell their house.

At some point earlier this year they must have checked their savings and shares etc and realised they would fall short on stamp duty and asked DH if he could help to tune of 10-15k. He said yes without thinking as he has savings, but in fairness, I wouldn’t have been worried about that so much.

Discussions continued (usually I would be out of the house at work) and then suddenly it’s May and it’s “oh, they haven’t got the house ready to sell. They’ll do that now but we might need to cover a bit more and they will pay us back when they sell, but I have it in savings.” I stressed that a 52 year old unmodernised house doesn’t need much doing to it and they should just get the crap out and into storage and then sell as is to someone that will rip it all out and start again. Another sibling said their friend was looking for properties for their rental portfolio but they were on holiday so they waited for the friend to come back but they weren’t interested. Then some distant family member is an estate agent but they couldn’t value the house for several weeks and they are so paranoid about being ripped off that they refused to go to anyone else, and also didn’t want to be paying for storage for that time either. And then it was a fortnight before photos could be taken and another week for the energy cert and we’re now in mid-July and the house still isn’t listed.

All of this is 100% in character for them.

I was actually really worried about BIL yesterday. I had seen a photo of him from the weekend and he is so skinny and looks to have aged a decade in just a few months. He and his wife have very demanding jobs with travel and they have to juggle a lot. They have always expected to become PIL main carers but he almost broke down yesterday at the thought of PIL staying 45 mins away and the extra pressure this will put on him and his family. (Other 2 local siblings are really selfish so can’t be relied upon.) I have always got on with this BIL and SIL who are incredibly clever and hard working so I do trust what he is telling me. He also didn’t know that I had these concerns (I suspect DH has been trying not to add any additional stress) and appreciated me talking to him as there are a couple of other things that could easily be security for our loan if the house doesn’t sell quickly. These are things I know about and which he is getting the paperwork together for.

He agreed that the £30k write off that they would have if they pulled out (not in anyone’s best interests) is a buffer for getting the house sold, and took the names of the “we buy any house” companies I found to start contacting them.