Tax avoidance? Parent buying house for child on loan.

[emmalinewre]

Hi!
A few year ago my dad gave me and my sibling £200k each to buy a house each - on the condition that we sign a contract with him paying him back £600 per month on an ongoing basis.
Friends at the time were pleased for us, we're very lucky to be on the propery ladder - I appreciate all that.
However, it has become rather a burden as that is a lot of money a month to find, and I suspect this is some sort of way my dad can avoid tax - as he refers to these monthly payments he gets from us as his 'income.'
He also has around ten different savings accounts, some in the UAE, which seems a bit shifty.
Can anyone with knowledge of tax/similar advise as to how he may be benefitting from this arrangement?
My sibling thinks its all great and he's just a wonderful parent, but myself and husband feel rather locked in and controlled financially by the situation - and with no way out as its not as if we can buy out of it.

Thanks!

So you took out what is effectively a 30 year loan/mortgage from your dad - and you’re not allowed to sell/move as per the contract? And you state that he’s a bit of a psychopath? That doesn't sound like a good move in any respect.

Your first concern should be getting a solicitor to check over that contract and advise you whether it’s legally enforceable and what, if any, would be the actual consequences of you breaking it.

You also make out you’re helpless re selling the house. If it was in the contract, you knew that was part of the deal (that clearly you didn’t think through because you wanted the money). Whose name is the house in? You are free to dispose of your own property however you’d like, and if his loan isn’t a registered charge against it he would have trouble enforcing this. But just remember - you agreed to all this upfront. Just because you don’t like it now isn’t a good idea to start accusing your dad of dodgy financial behaviour.

I mean in MN posts as that is what you were referring to? Not your social circle.
And OP has this loan plus a mortgage, so my comment applied to her situation, not your social circle.

I know, that was my original point.

Of course it's his income he loaned you £200k to buy a house and tbh you got a great deal out of it. You sounds so ungrateful. Or did you think he should just give it to you? 🙄
I wonder if you'd be so bothered about tax if your dad had done just that and you didn't have to give it back?
Why don't you report him to the HMRC if you're so concerned and have done with it...

Hey
How about you sell the property With the addition equity he gained on it .

Save your own deposit. And buy your own house. You'll be paying over £500pm just for interest the first ten years or and that's if you buy a small house waaaay outside of London.

Your rent will be £1300plus.

Sell the house and start from scratch.

What a joke!!!!

Youre conflating different rules - IHT isn’t applicable to a loan.

The outstanding balance of a family loan owed to the deceased is in fact included in their estate for IHT calculations.

Editing to add a blog post on this by a law firm- easy read
https://www.bdo.co.uk/en-gb/insights/tax/private-client/making-a-family-loan-watch-out-for-the-tax-issues

And he can't stop you selling the house. If you're so bothered then sell it anyway and just pay him the £600 a month until the £200k is repaid.
You decided to get a mortgage on top of the £200k so that's on you, not sure why you keep bringing it up like nobody else here has a mortgage ffs.

If the house is in your name, then he can’t stop you from selling it. And you can either pay him back in full, or put it in an account, set up a standing order to pay him back £600 a month.

What happens if you can’t pay your mortgage and the house gets repossessed?

No solicitor would think this was an airtight contract

Surely you don’t have to live there. turn the whole thing into a btl with a btl mortgage and start again in a different house

Just wondering how you filled out the mortgage application because the whole thing sounds dodgy

Who owns the house.

What exactly would happen if you did sell and just kept paying him

Sounds as if the father “gave” them £200k towards the house purchase and said it was a gift so they could then get a mortgage for the balance. The “loan agreement” then sat outside of that and was not declared to the mortgage lender. This enabled the OP to purchase a property that they couldn’t really afford and now for whatever reason, they are struggling to repay the unofficial loan. When gifting to children for house deposits the bank through which any mortgage is being arranged requires a letter from the gifter stating that the funds are not a loan and that there is no expectation of repayment.

As there is a signed agreement in place then I suspect it is entirely possible that if the OP decided to stop paying the dad could effectively employ legal means to get the balance of his money back.

@emmalinewre

The "good news" is that you signed a contract with him.

If you are worried speak to a solicitor. The payments are not "income" to him

@emmalinewre
It all sounds a bit strange and I can't see that the part about you not selling the house is enforceable.

This

200k of your debt for your house is interest free. You are benefiting out of this arrangement.

If the monthly outgoing of £600 plus mortgage is too much then sell and downsize reducing the mortgage on your house but continuing the £600 to dad.

@emmalinewre Can we just clear up the conditions of the loan?

So far all we know is that he advanced you £200,000 and you pay him £600 every month.

After one year, having paid him £7,200, how much did you still owe him? Possible answers could be:

• £192,800: Equivalent to an interest-free loan
• £194,770: Equivalent to a loan with 1% annual interest, compounded monthly
• £196,758: Equivalent to a loan with 2% annual interest, compounded monthly
• £198,765: Equivalent to a loan with 3% annual interest, compounded monthly
• £200,000, version 1: Equivalent to a loan with 3.61% annual interest, compounded monthly (i.e., your £600 exactly covers the interest
• £200,000, version 2: Some weird "loan" with no explicit interest rate, but you never pay back, and you're tied into paying your Dad £600 for ever because he did you the £200,000 favour.

Especially if the answer is the last of those (£200,000 version 2), the next question is: When does this contract stop? When your Dad dies? When you die? Never (the contract ties in "all of your heirs and successors in perpetuity")?

Depending on the answers, this could be anywhere from the best to the worst deal ever, but the devil is in those details.

You'd have to give more detail on this for anyone to be able to ascertain the true situation. How long are you pay £600 per month for? Until we know this we can't tell if he is charging you interest? Does the debt get written off if he dies and how old is your Dad now?

So to repay an interest free loan of £200K at £600pm would take approx 27years. If that is the deal, you are onto a winner as the house is accumulating value and you have had an interest free loan.

In this scenario if you kept the house for say 10 years then sold it and repaid your Dad the £200K, you are are quids in.

Sounds to me like an inheritance tax dodge but need more info to ascertain.

You are ridiculous. You owe him money and now you are considering it unfair that you should pay it back. The tax thing is irrelevant. Stick to the deal. If you're not happy, sell up, pay him what you owe and get a house without his help.

Agreed.

But this isn’t a gift. It’s a loan. So entirely different.

Have you missed the point that he may be only able to offer her the money by tax evasion or avoidance and she is being manipulated in order to facilitate his lies?

Nothing else matters.

I was replying to another poster who said that parents give money for houses in lieu of uni costs. I said it's possible to do both. He had to HAVE the money in the first place to loan it!

@emmalinewre you need to separate out two thing here.

1 you can't afford the £600 plus the mortgage. That's bad planning from you. If you sell up you will presumably down size or maybe rent.

2 How your dad got the money isn't clear. what difference does it make finding that out? Is this so you can 'breach; the contract and 'blackmail' him with your knowledge of dodgy tax affairs?

3 He can't stop you selling up unless he takes you to court for breach of contract.

Rubbish!

She willingly signed up for the terms of the loan, so she was complicit in whatever dodgy dealings (if any) there were in providing that money to her.

She's only 'concerned' about the source now she's apparently finding it to be a financial burden. I call bullshit on her concern.