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!

Six hundred pounds a month is very reasonable. I charge my daughter and her husband over a thousand pounds to live in my rental property. OK they will inherited it one day but parents need money to live on too.

Let me see if I understand this.

• Your dad loaned you £200K to buy a house.
• You knew this was a loan
• You knew you had to pay £600 / month
• you’re not paying interest on that loan

I’d say your dad has thought out very clearly how to help his children, which your siblings don’t have a problem with?

if you don’t like being beholden to your dad, remortgage, pay your dad back in full and enjoy paying back a different loan to a bank, with added interest.

you’re an ungrateful idiot.

And BTW your dad’s financial affairs are just that. Your dad’s.

Why can’t you sell the house and pay him the remainder if it’s bothering you?

Well you knowingly signed up to it, so you can’t now complain.

My own Dad died a couple of years ago. So I have discovered first hand a about tax implications. This is his money so the main tax implications I see are inhertance tax implications (I am not an accountant btw). There are financial restrictions on how much money / assets can be gifted to children per year. Currently the limits are £3000 per year in total which an individual can gift to children. There are other rules for giving away wedding money gifts and paying school fees. You can look this up yourself on the government website. There are also inheritance tax allowances. So basically when your Dad dies his estate will be calculated for the purposes of inheritanx tax and any amount he has in his estate above the inheritance tax threashold will be taxed at whatever the government amount is at that time (it was 40% when my dad died). So (for example) if he has a million pounds in his estate (assets and money) when he died and (for example) the tax threashold was £500k then the other £500k would be taxed at 40 percent. The rest is paid out to his beneficiaries of his estate as set out in his will. If he gave away £400k to his children within 7 years of dying (or needing care eg a care home) then the £400k is still counted as being within his estate and still taxable or used to fund care fees. This is called 'Deprivation of assets'. He has probably logged it in a contract so that he isnt deemed to be evading tax by giving away his assets to his children. Maybe in his will he has stated the loan does not need to be repaid to his estate upon death as a way to help you in his life and get more money down the generations to you. If he dies after 7 years then the amount is not classed as being within his estate (I think). More info on that here: https://www.wansbroughs.com/news-events/is-it-a-gift-or-is-it-a-loan-how-are-they-treated-on-death/

In terms of the amount £600 is really really reasonable. I know of a 19 year old who is paying £900 per month to live in a flat above a shop (needing to borrow money each month from his mum to avoid homelessness). If you are financially struggling see what other expenses you can curb each month, or speak to your dad about having a month off or lowering the repayment amount a little. But overall if my Dad had done this for me in his life I would have been sooooo grateful (he didnt have the finances to do so). If you have concerns speak to your Dad. If you are feeling controlled then go and get a mortgage and repay the remaining amount outstanding to your Dad - then you will be feeling controlled by the bank and need to repay them monthly rather than your Dad but at least you wont need to have family time with the bank if it is the overlap of finances and family which is concerning you. I think it would be worth you checking out the mortgage rates and repayment amounts and years to repay your Dad out of curiousity - it may give you a whole new perspective on your Dads generosity.

First of all, if you have a mortgage on your property and used the 200k as a deposit to purchase the property, you would have had to prove where the 200k came from. There has to be a proofable trail for the money.
So if there was anything dodgy about the money, it would have shown up when buying the property.
If you are struggling to pay back the £600 a month on top of mortgage payments then renegotiate your payments with your father?

A parent giving a loan to a child to buy a house is not unheard of. What is unusual is that the contract says you cannot sell the house nor repay the loan early. Usually a contract would detail how repayments are to be made, interest (if any) and any early repayment penalties.

what you have is a loan from your father to buy your house. You also have a mortgage, which is also a loan to buy your home but with the home itself effectively as collateral. The mortgage will be recorded at land registry for the bank to protect it’s interest in your home.

presumably, this is not the case with the loan from your father? Is there a charge registered against the house from him?

importantly, when buying the house, you will have needed to illustrate to your solicitor where you got the £200,000. did your father sign a document that this was a gift? How did you show where these funds came from if not declaring as a gift?

if you did not declare this as a gift, you may have committed mortgage fraud.

Going back to the loan from your father, the terms are classed as unfair contract terms and would not stand up in a court of law - which would be the only way for your father could try to enforce the contract you have with him.

if there is no charge from your father registered in your house, you can sell without any input or even giving notice to your father. If there is a charge registered, you need to pay him back to remove the charge.

You could simply repay loan and show proof of repayment to have charge removed. You have his bank details, just make the deposit noting “full and final payment of house loan” (include charge number too).

if there is no charge registered. You could also remortgage your house with the bank to include what you owe your dad and just deposit into his bank account also noting as “repayment of house loan”. He is not going to try to sue you in court for repaying an unfair contract.

however, I suspect you have borrowed more than the bank would permit (your existing mortgage plus £200,000 loan from your father). If so, then you’re complicit in mortgage fraud. You need to think carefully what you want to do about this. Perhaps repay your mortgage faster to reduce overall debt (debt if your existing mortgage plus your loan with father) so that you can qualify for just one mortgage (one loan) for your house purchase, sell house to achieve the money to repay your dad and get another mortgage for entirety of your onward purchase. Just cut your father out of your finances.

your father is unlikely to do anything about any step you choose because he is being dodgey tax wise and it would cost him a lot in legal fees. Thus is not a county court action due to high value plus no one is going to represent him with such an invalid unsecured loan document that was repaid.

I’d say your dad has thought out very clearly how to help his children, which your siblings don’t have a problem with?

Come on, daddy dearest is as dodgy as hell. You're as naive as the OP who isn't coming back and could be in a lot of trouble. Even the fact that he says in the (unenforceable) contract that OP can't sell her house is suspicious.

I'm guessing that the OP may not have declared the £600 per month going out of her account to repay her father's loan when they applied for the mortgage either.

It may be that the OP used her father's solicitor for conveyancing when they bought the property, in which case the solicitor knew that the money was coming from her father. Unless the firm is very dodgy it's unlikely they would knowingly get themselves involved in money laundering.

That's very cheap pm for a 200K loan.
His financial affairs are not your business.
You were happy to take the money.
If you're now not, pay him back and buy something you can afford.
And calling your dad dodgy when he's done this for you is so bloody ungrateful.
Cut the apron strings and stand on your own two feet.

Ignorance is no defence if she gets done as an accessory to fraud tho is it? And she does have her suspicions

Then pay him back. Easy.

Think yourself lucky. That's cheap.

The only evidence we have of Daddy’s dodgyness is OP’s suspicion, nothing in the OP’s posts themselves show any evidence their father is anything other than a wealthy man.

She also pays a mortgage

your understanding of the rules around gift from excess income and inheritance tax is poor
We have only 2 facts, 200k gift to each sibling from father's "wealth" and a requirement for £600 per month repayment
we also have the spurious statement (the contract) "is dodgy"

to regularly receive money back into his estate is not making an exempt gift from surplus income falling outside his estate for IHT. It is simply a repayable loan with the o/s balance falling into his estate at any point in time.

As others have explained, whether a will then gifts the o/s balance or alternatively calls the loan in, is where any IHT exposure will be crystallised.

That’s not relevant. She has a £200k loan that she’s paying back at £600 a month. Find the mortgage or loan company that will lend at that rate!

@Wot23
I agree, surely even if a will gifts the o/s balance to his children this is a still a legacy and within her father's estate. You can't make a gift in your will and bypass the seven year rule.

There's no tax avoidance that I know of that looks like what your father has done, in fact it looks quits generous, £600 a month is much less than most rents, and lower than a conventional mortgage. I think you're very fortunate really to have this arrangement.

You went to a solicitor who said it looked dodgy, so why go ahead with it?

You agreed as it suited you at the time.
Blame yourselves for agreeing to it instead of trying to suddenly be all innocent.

If it's your house, how are you not allowed to sell it?
Is the contract saying no to selling or that repayment plan has to be monthly?

If the latter, then sell and still pay him monthly through direct debit.

My thoughts exactly. £600 is pretty cheap these days. My tiny two bed house would rent for around £800 a month.

@tempname1234
if you did not declare this as a gift, you may have committed mortgage fraud.

I think you have a typo. The OP would have committed mortgage fraud if she had declared the £200k as a gift. The £200k was a loan not a gift.

I agree, it clearly is not a gift but a loan as her father wants it back. She has committed to paying it back every month, so whether or not this is mortgage fraud depends on whether she declared it as a regular outgoing from household income when she took out the mortgage.

And if her dad signed the forms to say it was a non-repayable gift.