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!

@NoWordForFluffy it was always a loan, and taken into account in our monthly outgoings like anything else when we applied for the mortgage. I honestly don't remember if they saw the contract, I assume so if that's standard.

But you only realised after you signed it that you were locked in to 27 years of repayments and not being able to move?

I have absolutely no resentment whatsoever, and why you would think that is indicative of your small mindedness about everything. You clearly came on here to have go about your father and to try to get evidence of some wrongdoing. It’s pathetic. You reply nastily to anyone who dares to challenge you. YOU borrowed this. Money off your father and now purport to having not spoken to a solicitor beforehand. I find the whole story of a solicitor telling you it sounded dodgy, to be complete rubbish. If your solicitor had been in any doubt whatsoever that this was in any way illegal, they would have refused to complete the transaction and informed your building society. I’d like to bet that you did not disclose to the solicitor or your mortgage company that this money was a loan that had to be paid back, probably because you wouldn’t have reached the affordability threshold if you had. That’s clearly the case given you’re now struggling to pay back a cheaper loan than a mortgage. Crawl back under your nasty spiteful stone and when you come out again, maybe put on your big girl pants and pay back what you owe and stand on your own two feet.

It would be extremely unusual for a lender to agree to a mortgage when there is another lender involved. And even more unusual when that lender apparently has made it a condition of the loan that the property can't be sold.

@lyraloo
Omg honestly.
The solicitor was seen seperately - I'd already got the mortgage by then. We weren't over any affordability threshold. It was all above board. It was declared as a loan. Why on earth would I make any of this up? What in gods name does that achieve?

You can roll your eyes all you like. You still took the loan, signed the agreement, applied for the mortgage and bought the house before thinking “Ooh, where did the money come from?”

You’re calling everyone on here “psychos” when you could have just made some very basic checks before doing any of that. But instead it’s everyone else’s fault.

Why are struggling to pay it back then? I don’t know why you’d make it up but I do know that it is your solicitor who has to draw done your mortgage. You saying you had the mortgage by then, simply means you agreed a deal. The solicitors handle all the transactions and have to be very thorough about money laundering etc. if they thought anything was fishy they would, by law society rules, have to investigate and declare it. There is no way this would have all been finalised if your solicitor voiced to you that it sounded dodgy. Something about your story sounds very dodgy to be fair!

Actually I’ve just thought this through. Was your intention to try and get some proof that your father was doing something dodgy so you could blackmail him into writing off the loan. Seeing as how you made it clear you’re struggling to pay it. Just a thought🤷‍♀️🤷‍♀️

OP, rather than getting annoyed at pp for making (mostly) reasonable points, why not take some of them on board. If your father really drafted a contract that said you have to pay him in instalments rather than paying the whole of it back to him (which frankly, is an unenforceable clause if it really is in it) that still doesn’t stop you selling the house, putting the money you owe him aside and then paying it from that lump sum on a monthly basis. He CANNOT stop you selling the house. It is literally not possible. As I and others have repeatedly said.

An awful lot of assumptions here. “Oh well, I assume they looked - but now I can’t repay the loan and I’m confuuuuuused”.

'And my dad's well dodge, but I didn't care at the point he loaned me £200k, as I was more interested in getting my hands on the cash than whether it was a bit ropey in origin!'

At the end of the day, can the op say they acted with integrity from the word "go"?

I think not.

And lo! A star appeared in the East. 🌟

I agree with @minceyminceypies

I would query why the dad gave a loan on such advantageous terms to his dc.

There is no IHT benefit to his estate in giving a loan, he could easily get more interest or annuity income of that sum, the 600 repayment is very low and the condition of not selling the house is pretty unusual.

My bet is that he got the 400,000 in circumstances that cannot see the light of day and he could not have that money sitting in his bank account where it could be queried. The safest was to seemingly 'gift' it to his dc so that the sum leaves his account but receives a sum he can live on which he could class as capital repayment or financial support from his dc, not interest hence no income tax needs to be declared or paid.

This ensures that his 400,000 stays under the HMRC radar whether it was dirty to begin with or even if it was clean a way to get an income without declaring/paying income tax.

My guess is that the OP may or may not have signed a contract with her father, hence she is vague about the actual terms of repayment other than the 600 repayment. If so, this is another sign that her father wants to keep the arrangement under the radar, so he can blow hot or cold to his advantage depending on who is asking.

I am also guessing that OP did not declare the 200,000 'loan' or the 'gift' when she was taking out the mortgage with her bank. This is because a bank would not normally allow a second loan/charge on the property. If it was declared as a gift from the father (which in itself is not quite the truth), the bank would have investigated the father's source of wealth/funds as part of their money laundering checks, which I assume the father would be keen to avoid.

I would be interested to be told I am wrong by the OP.

I am also guessing that OP did not declare the 200,000 'loan' or the 'gift' when she was taking out the mortgage with her bank. This is because a bank would not normally allow a second loan/charge on the property. If it was declared as a gift from the father (which in itself is not quite the truth), the bank would have investigated the father's source of wealth/funds as part of their money laundering checks, which I assume the father would be keen to avoid.

Her solicitor has to do AML checks on all funds used, so she would've had to have shown it building up in her own savings, or that her dad was the source and where he got it from. There is no way round the money being scrutinised as part of the conveyancing process. So either she declared the loan and its terms (unlikely), or she committed mortgage fraud with her dad and they declared it was a gift, with her dad completing the necessary declaration.

I find it odd how the op has not responded to one of the many posters here who have been genuinely helpful

Instead she responds only to argue

Hmmm……….

Quite a few pp's are suspicious of the loan arrangement, but actually a parental gift or loan are both quite common and a loan has some distinct advantages (quoted from solicitor's website)

• 'Providing money as a gift does mean losing all control over it, so think carefully before doing this.
• You could create a legal charge against the property, establishing a legally binding loan which would be repaid when the property is sold or following repayment of the mortgage. This option means you will recoup your money should your child get into financial difficulties or go through a divorce'.

So perhaps (and I am surmising here), but the loan agreement will very clearly have to outline it is a loan and won't be paid back as a lump sum, otherwise for tax purposes it becomes a gift. Also, the DF's charge over the house maybe why the Op and her DH feel they can't sell it.

Op - I am going to discount money laundering as anti-money laundering checks are should be all over any proceeds used to buy a house in the UK (perhaps naive of me, but let's assume).

So I would put my money on your Dad wanting to help you out, but also wanting to protect capital just incase you (or your sister, who has the same arrangement) divorse down the line or any worries that you may get into financial difficulties for any reason.

@NamechangeRugby, massively unlikely the dad has a charge on the house, as there's also a bank / building society mortgage. I really can't see how the mortgage co would have agreed to the alleged terms of this loan, even without a charge. Hence thinking mortgage fraud is more likely.

Well the Op says all the affordability checks were done and it was above board, so if you take that at face value then I guess the DF's loan would be considered like a second mortgage. Not unheard of and I assume there would need to be enough equity & affordability for the mortgage company to agree.

How does getting a second mortgage work?
It’s where a loan secured on the property is given from a source other than the original lender.
The second lender takes second priority to the first lender. This means if the property ever needs to be sold, the first lender will have first call on equity in the property.
As with any mortgage secured on your property, failing to repay it could mean you’ll lose your property.

So if all the stress tests were done for the original mortgage & loan, why is the Op now struggling. Well it might be COL increases over a very short time as she days. Or they had to renew their mortgage at a much higher rate. Or money is going on something else etc.

Well the Op says all the affordability checks were done and it was above board, so if you take that at face value...

Yeah, I don't believe a word of it!

I doubt that a commercial bank will allow a second charge on the property even if they took priority to the second chargee. The second chargee will have the right to force the sale of the property if they were not repaid, even if the bank was being repaid. No bank will take that risk for a retail customer. They don't have to and so they don't allow second charges.

Then why are you struggling to pay - specifically struggling to pay the loan from your father - now? You keep wailing “I’ve got a mortgage too!!”, but you won’t acknowledge that the £200k you have borrowed from father would be costing you a lot more if borrowed from a bank, regardless of any additional mortgage.

I didn't know he was dodgy at the time.
The bank knows I have that payment going out as an outgoing, they did all their checks, there has been no mortgage fraud at all.
I was very young and didn't know the ins and outs of it all.
Since agreeing to it, I've learnt some things about my father which made me question the legality.
I didn't think there was anything remotely weird about it when I signed it.

My financial circumstances along with many other people's has worsened - so many of you saying 'if you could pay it then why can't you pay it now HEY!!?!?' - LOL.
Y'all watch the news ever? The budget? Know anything about mortgage renewal. Job loss? Disability?
Get real.
But that's not why I'm asking. I'm asking about the legality. I'm not trying to get out of anything.

I can't respond to everyone as I can't keep track of it all and manage to sift through all the bile to get to all the genuine posts.
I was only asking a question.

It could be legal Op.

But how much reliance you place on it being legal depends on if you only declared the £600p.m outgoing or the entire £200k loan to the mortgage company.

If only the first, then no one has checked it for AML purposes. So it might or might not be OK - as I said previously there are valid everyday reasons why your Dad may have structured it this way. Although if only the repayment was declared, this may be mortgage fraud.

If the second, then it has been checked and the bank must have been fine with a second charge over the property (others have said this is unlikely, I don't know myself - if the bank take priority and there was a hefty deposit it is not impossible).

You talk of being very young at the time. How long ago was it? That will make a difference to the AML checks done I imagine, although they have been around a fair few decades now.

Also, I am a random on the Internet who only can guess at the arrangements or your Dad's situation, so what do I really know?!, but I've found the thread and people's financial beliefs very interesting. Take proper legal advice if you are convinced that money laundering was at play.

But the first thing I would do is a good chat to your Dad. You sound a bit scared of him, but he really might have done this above board and in your best interest. You are an adult now and can and should approach each other as equals - but take the heat out of the conversation - I do not advise even the merest hint of a suggestion that you think money laundering or that you resent repaying him. Just check his motivations for setting up the loan the way he did. Your Dad may speak more freely just with you and your sister, than in the company of your partners. Keep an open mind. Explain your situation - not asking for a handout, but how best to financially manage things and he may be incredibly helpful to you as it sounds (to me) as if he is good with money and that he loves you very much in his own way. Family dynamics are difficult and sometimes very difficult to outgrow, but set aside preconceived ideas and keep a really open mind. All best.