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!

Sell the house and downsize into something that’s more within your budget. You hopefully will have gained equity since you purchased.

Put the £200k (or whatever balance remains) into a separate account and gain interest on it. Pay your father the £600 per month from the account whilst also benefiting from interest on it.

@ribiera but it not outside of his estate if he is expecting it to be repaid? Which he is.

So, the £200k is outside of his estate. So that won't be taken into account eg for carehome fees, the £600 per month is income and realistically may be spent each month - general expenses holiday etc. care home would t be able to take £600 per month from a family member into account for fees

Unlikely. Proof of funds required by banks and solicitors. Would be very difficult to buy a house with £400k of undeclared money and no one to ask where it came from.

You need to get legal advice. No one can tell you here what to do because you’re not being forthcoming with the details. If the house is in your name, he can’t stop you selling it legally. If it’s not, I’d question what the details are and why you’re not sharing them.

The fact that you entered into a contract with your dad without ever getting legal advice makes you sound extremely foolish. If you couldn’t afford it then you couldn’t afford to buy a house and take a £200k loan on top. It’s my understanding that if he gave you money towards the house, he would have to either be on the mortgage or sign something to say the money was a gift?

A term that does not allow you to pay your loan back early would not be enforceable in court.

If your mortgage is too big then sell up and pay your dad back. If he won't accept the money just keep it and set up a direct debit for £600.

The only reason I can think he doesn't want a lump sum might be if he's on means tested benefits and not allowed to have much in the way of savings - but then I doubt he would be allowed all the extra income either so who knows. You just need to worry about you.

Are you happy to sell up and downsize? If not I doubt you will find a way to borrow an extra £200k for less than £600 each month.

Given the amount you borrowed and the terms, this is a 27 year loan ?

What did your solicitor say when the loan contract was drawn up?

There’s no tax payable on a £200k gift by either the recipient or the donor. If, and it doesn’t seem to be relevant in this case, the donor dies within 7 years then their estate will have an IHT charge on a tapering basis, but that’s not the problem of the recipient.

The only tax avoidance issue would be if there’s interest on the loan and he does not declare it correctly. Or if he died and tried to argue it was a gift to you rather than a loan as this has different inheritance tax implications.

What does concern me is whether you declared the loan to the mortgage provider or did you say it was a gift? Most banks won’t lend if your deposit is a loan rather than a gift.

But then it would be seen as deprivation of assets?

It’s tax avoidance most probably he doesn’t have a leg to stand on.

Is he charging you interest? If so I’d stop paying that.
I’d also tell him you will repay at 400 or whatever over a longer period

I'll be honest assuming you declared the 200k as a gift for mortgage purposes (you will have had to show where the £ came from and he will have had to sign to say it’s a gift) and he doesn’t have a registred interest in the house the contract is likely invalid even if not it’s likely unenforceable and he doesn’t have a leg to stand on

ie unless he has registered interest in the property you CAN sell.
i would not want to sell so I’d just say repayments are decreasing / stopping
the worst he can do is write you out of the will or go NC

Is he charging you interest on the £200k or are you paying back the capital only (ie are you paying back the £200k if yes how much is left to pay).

Im not a solicitor but I can’t see this being enforceable. And even if I’m wrong about that do you really think your dad is going to sue you if you sell and say here’s your money back? And even if he did he wouldn’t have lost anything so he wouldn’t be in an actionable position because he wouldn’t have lost anything. So I think you probably could sell and pay him back. Of course you might not want to for various reasons.

I agree with others who say his tax affairs are his business but that’s a large amount of money so you should take advice on how that works from an IHT point of view to make sure you don’t get hit with a tax bill down the road.

this is exactly what I was going to suggest - problem solved.

Can I ask, did you declare this loan to the bank that gave you the mortgage or did you sign something saying to the bank that the £200k was an outright gift from him?

Did you, indeed, put any money down as a deposit at all or was the "deposit" all by way of the loan from your dad?

If you did sign something saying that the money was either your own or a "gift" from your dad then it is you that was being fraudulent and hiding the loan from the bank.

If you did declare the loan to the bank then I guess that there must also have been a large deposit as well as I cannot imagine a bank lending against a property in that situation if there was not sufficient equity in the property.

So, did you tell your lender that the £200k was actually a loan that had to be repaid?
.

"Can anyone with knowledge of tax/similar advise as to how he may be benefitting from this arrangement?"

From a UK point view (I don't know about other countries) there really is no benefit at all to doing this. If anything, this is probably an example of what you should not do in order to save on tax.
.

The bit about not selling the house is likely to protect him from losing his money. The bank also has a similar thing so that if you ever sell the house then they will get their mortgage repaid.

Does the contract say that the house cannot be sold at all or that any money outstanding must be repaid, for example?

I am going to ignore the bit about the burden of repaying your interest free loan and focus on the sale restriction. You need legal advice on the terms of the contract you have signed. Does it say something like you need his consent to sell, not to be unreasonably withheld? That might just be to protect him in the event you sell at a price that wouldn't leave enough to repay him the balance of the loan.

If you can't afford a solicitor you could post the actual clauses under legal, but be aware that's not proper legal advice, just random on the internet that may or may not be qualified.

I'm a tax adviser. There's no UK tax advantage in this scenario. If he lives out of the UK it might help him save a wealth tax if he isn't declaring the loan.

He can't stop you selling the house (unless he has a charge on the house, but unlikely given you have a mortgage) and transferring him the money. If he transfers it back, then you could put in a bank account and set up a standing order to pay him £600 p/month. This would be funded by the sale proceeds so wouldn't affect your monthly budgeting.

If the contract is a loan contract the £200k is part of his estate still because it’s still his money. No different than if he bought a buy to let with it - he doesn’t have the cash but still owns the asset. There are also gifts with retention of benefit rules for IHT. In order to not be part of his estate it would need to be declared as a gift. Someone else has mentioned maybe the £600 a month is a gift too. But that being the case as far as HMRC are concerned it’s the OP’s money not her fathers.

OP, you need to look at the deeds and check whether your father has registered the loan as a charge on the property.

There is no legal way that you have a property that can’t be sold if you have a mortgage. The lender can always force a sale in the event of a default no matter what.

But it's not out of his estate. The amount owed to him is an asset within his estate.

Remortgage for the entire value of the house. Pay him everything that remains back. You haven't sold the house. You're free of him.

Sweet deal
Have you seen the interest rates?

Wow! The entitlement pouring from your posts! 🤣

Your Dad gave you a loan of 200k and you’re whinging about having to pay it back, in perfectly reasonable instalments.

If you have a mortgage on top, and you’re struggling with your outgoings, then you clearly let greed get the better of you and bought a house far above your means.
If your Dad hadn’t lent you the money, you’d have had to borrow it from the bank-which you likely will have been turned down for.

Best advice is to sell up, buy a house you can actually afford and continue paying your Dad back

Just as an aside... tax avoidance is legal.

What utter rubbish. A loan is an asset to the estate in the event he dies before it’s repaid. The executors then have a responsibility to recover the loan, and the cash forms part of the estate for IHT purposes. If indeed it is a loan, and this story is real….

Working on the basis it is (a bold claim I know…) then the repayment of the loan by the OP to her father is also not tax avoidance if there is not an interest element to it, which there doesn’t appear to be as it’s just repayment of capital

It could however be a way of bypassing the savings rules, to enable the OPs father to claim more benefits than he’s entitled to. But (again if this is to be believed) it’s unlikely someone who has sufficient funds to lend £200/£400k has no other savings. So this seems unlikely as well.

Could it be deliberate deprivation of assets to make sure he doesn’t have to pay a care bill? Unlikely, as a loan is is still an asset to him which would be assessed by the local authority, and even if the terms were such they couldn’t force repayment (again, if we believe the terms as explained…) then they will just have a charge over his assets such that they recover their cash when he dies.

Furthermore, the chances of anyone being able to launder £200/£400k of cash by lending to family to buy property using some mechanism that’s acceptable to the bank, which has also extended the OP a mortgage, and pass all the KYC and anti money laundering checks that the solicitors will have carried out on the source of the funds, are non existent.

Which just leaves the most likely explanation of this being a made up story…of the OP has fundamentally misunderstood the arrangement she has entered into!