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!

How else were you proposing to pay back the loan if not a regular monthly payment?

WTF are you talking about? Your OP:
"it has become rather a burden"
"I suspect this is some sort of way my dad can avoid tax"
"some in the UAE, which seems a bit shifty."
"locked in and controlled financially by the situation - and with no way out as its not as if we can buy out of it."

Suggests you would prefer that the debt be written by gifting the money to you.

and the only real question you have asked is impossible to answer since you won't provide the info on how much is repayable.
"Can anyone with knowledge of tax/similar advise as to how he may be benefitting from this arrangement."

On the info provided he is not benefitting - he gave you (and your sibling equally) access to money that it appears you preferred to accept rather than add to your mortgage as the latter would be at a commercial interest rate.

You are now making unsubstantiated allegations about your own father. Let's hope he is nonetheless proud of how you turned out

What would happen if you said you couldn’t pay him £600 per month but you can now only afford £300

Did your dad put in the contract contingency clauses to cover differing scenarios

Surely the mortgage lender doesn't have a say if the loan isn't registered against the property?

OP, how do you think your father could stop you selling the house and paying him back? He could try taking it to court but I just can't see it getting off the ground as he wouldn't be suffering any loss.

Mortgage companies have a right to know if there is another loan used for the deposit. That’s standard. Not declaring that fact is fraudulent. The op has a loan for the deposit. The mortgage company needs to know this. We gave our DC money for deposits. More than this. We had to devised the deposit was NOT a loan. They don’t repay 1p. It’s good for us to reduce IHT liability and we have plenty left!

So a loan is a help and a hindrance. A gift is the most useful way to fund a deposit. The OP has quite a burden and if parents can afford it, they should give the money. Give what they can afford. The loan just adds to outgoings and a mortgage company should ask questions about it and be told the truth.

How much is repayable is the amount loaned - £200k.
Not sure why you're confused, that seems obvious.

You still owe £200k?

I think that depends on the relationship between parent and child. The op doesn’t appear to have a relationship with her father and prefers to slag him off on mn! I don’t think I’d be “gifting” her a deposit, would you?

Not sure you can say what your father is doing without having investigated by the tax office.

you can make an anonymous tax report to the tax fraud office. They can investigate.

the other thing up can do is sell the house …. Put the money you borrowed from him in a separate account and pay him the £600 from the account separately.

You’re then free to buy a house without his help or loan.

Yes. If I had the money. There’s clearly an issue because of the loan repayment which is stopping a normal mortgage . It is a mistake to try and borrow twice on a property. This is, essentially, what the problem is. Parents should be honest about what they can give and what they cannot. This loan is going to take around 28 years to pay off. That’s longer than many mortgages and it makes little sense for the father either. He’s not making anything at all on the loan. So in essence, he could have probably given £100,000 and left it at that. There’s only disagreement because dad has chains attached to the money for 28 years. I would not expect repayment and I would give money for the reasons I said earlier. The dad might be dead in 28 years. He doesn’t really need this money repaid if he’s got plenty of other investments. Just see it as lowering IHT liability.

Everyone had a free choice here. It was very kind of the father to make a loan with £600 a month repayable which is a lot cheaper than many rents. it also means if either recipient gets divorced the other half will not have their hands on the father's remaining debt owed back to him.

Obviously just sell the house and pay the father the £200k if you prefer.

Tax: He would be taxed on the income from the loan. £600 x 2 each month added to his income. His estate would be liable for IHT on the loans, if applicable. Difficult to pay if in a property. Hardly liquid. So he’s not benefiting by loaning money. Nor his estate. If he needs to lower IHT, he needs to give it. If he’s sheltering illicit gains, that’s another matter but usually people who don’t need £400,000 don’t need £1200 a month from dc as a repayment over 28 years if it keeps the money in the estate and liable to IHT. If he’s not a uk citizen I assume IHT does not apply,

Gosh, can't keep up with the various threads within this one thread it's been quite the read though!
OP, I think you shouldn't worry about your dad's tax situation - it's his problem if he's done something wrong. I have read quite a few of your posts and I don't quite catch what it is you have a problem with? Are you worried your dad will end up in trouble? Your tone doesn't suggest that you are but I can't think what else you're worried about, unless it's that you've done something wrong.?
We also bought a house with a large parental gift and the mortgage company insisted on a written agreement that it was not to be paid back. Our solicitor also asked for quite extensive paperwork to verify where all our money was coming from inc our parents funds. So, what I am saying is that there are safeguards in place to protect against fraud, regardless of your age. Solicitors are typically pretty hot on this element so I would be astonished that a solicitor didn't want to have a copy of your loan agreement with your dad before the purchase - that seems a crucial part of the paperwork.
To me, none of this makes sense. But if, as you say, it's all above board from.your POV and it's just that you can't now afford the payments then it sounds like you need to move - if all the money from the bank then you'd be in the same position as they would be charging you for that extra money.
In which case, you need to sell your house and put whatever you still owe your dad into an account and pay him back as he'd like. You'll earn interest on that money so there is a capitals gains issue - get tax advice from a professional and understand the paperwork. Or just pay him back the money - I doubt the clause is enforceable especially if he's doing something dodgy. If you're paying him back you have his bank deets - just pay the money and draw a line under it.

yes and it is very common for parents want a loan not to make a gift either because they want the money back eventually eg he might want to retire abroad and use his money then or because they are worried the child will divorce and want that loan element not within the marital assets on the divorce.

There is absolutely no risk to the recipient of this gift in terms of illegal tax evasion (avoidance is lawful of course and again nothing to do with the recipient daughter).

Make sure the loan terms are clear other than just 600 a month paid back so it is clear when he can get it all back earlier, interest or interest free etc. As was said above your solicitor will have already asked about source of funds eg parental gift, parental loan or whatever. I have certified to my adult child that a gift was a gift ( as indeed it was)

Not so obvious.

If you had been paying £600 capital each month, the loan would be interest free, your Dad is just getting his own money back (albeit very slowly & minus inflation), he has no income tax to pay and the loan would be paid back in 27-28 years.

If you are paying back purely interest, as you seem to be suggesting, then you are paying back 3.6%p.a. flat rate until his death. It would be part of his income tax calculation. What is to happen to the loan at his death? Is it forgiven? You say you will not be receiving any Inheritance.

I can't think why anyone would do the second option if they never wanted it repaid. It makes no sense for Income or IHT purposes. It is of no benefit to your Dad. Unless there are other beneficiaries to his will, in which case you'd have to repay it on his death.

Are you certain you aren't repaying Capital? ie the balance owed goes down each month.

I’m not sure the OP is sure of anything…..

then it has taken 18 pages to get back to what was obvious from the start

• you have no evidence to support your claim that your father is evading tax since he is not earning any income from your repayments as you will simply be making 333.33 payments of £600 over a 27+ year timescale.
• your father is not making money the loan (no interest) and moreover is actually losing money due to inflation over that 27 year period
• your solicitor has met his obligations in establishing where the 200k loan came from. Where your father got that money from is irrelevant
• whether your father has money abroad or not is his business, are you really that annoyed with your own father that you sink to such interference?
• your father has done the same to your brother. Yes it appears your father has a lot of money which for unknown reasons he does not yet want to give it away to either of you. However, when your father dies the position will be resolved, I hope he still thinks enough of you to include you in his will, but the tone of your OP suggests that you are not grateful to your own father.

What is your end goal, OP?
To have your father write off the loan as a gift?
To have him prosecuted for tax evasion or money laundering?
To sell your house and repay him the remaining money from the £200k as a lump sum?

but OP claims the total repayable is 200k so there is no interest element and no tax. Although of course we cannot be sure of anything OP says

As part of the £600 a month, or maybe even all, could well just be a return of his capital then it's not necessarily the case that £1,200 a month would be subject to income tax (under UK tax law). And if he's resident offshore then all bets are off on the IHT front as you say :)

Yes, I was thinking the same- if it is interest free then what is paid back is purely his own capital. There should be no issue for the very kind father and if the recipient does not want the £200k loan they can resell the house and pay it back immediately. Instead I suspect they want it to be a gift - well tough, it wasn't.

There is no income tax due on loan repayments if it's interest free. It's then not income. If I loan bob £1000 in February and he pays me back £1000 in march that is not treated as income. Same if Bob paid me £100 pm for 10 months. If OP's repayments are to continue after 333 payments of £600 have been made then it wasn't interest free, but income tax would then be due for the interest element for the whole of the 27y9m of the loan (but not the Capital element). The tricky bit is how to predict how far beyond or before the 27y9m period the father will survive for.

That’s true if the £600 x 2 is not interest. No tax. Cannot see a dodge but it’s a very long repayment period so DF might die before it’s paid off. As I said earlier, he doesn’t need the money on this basis so might as well have given a proportion of it.

I would imagine the reasons not to give were (i) because the father wanted to feel he was getting some of it back to keep him going but also (ii) to protect thge £200k from the child's spouse on a divorce