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!

I think what the OP is saying is that she effectively had 2 loans to pay - the mortgage and the loan from her father. That’s what she’s saying is a lot. Imagine having to pay another £200k loan on top of your mortgage - lots of people would struggle with that.

We couldn't afford to engage a solicitor

You couldn't afford not to.
Engage one now and sort it out.

He may be using it to avoid tax or something but you’re getting a house for £600 a month out of it and presumably not paying any interest on this loans. A quick look on a mortgage calculator shows you would be paying over £1k per month for a mortgage of that amount and would end up paying at least £10k in interest. You have got an amazing deal. If you’re not happy with it then sell the house, give him the £200k back and see what you would be able
to afford within your budget but I would find ways of making this agreement work before doing that.

you should have looked into it properly before signing up…no point whinging now🤷‍♀️

You should not have accepted those terms, but you did, and now you are stuck with it. This was obvious from the start, and you were told it was dodgy but still went ahead with it. Couldn't you see he'd have a level of control on you for the rest of the repayment term?
If paying him back on top of your mortgage is hard, then you clearly have a house that is outside of your means to own, therefore, it should be worth a fair chunk.
I think you have to accept that you will always be stuck with the repayments to him, until the term runs out, but you can still sell the house, buy one you can afford, pocket the equity, and put it towards paying him back monthly so there is less pressure every month.
Gradually build up to the house you have now over time by selling on subsequent houses and gaining the equity each time.

But surely the bank would need to know about the £200k.
Her df would have had to sign that the money was a gift or the bank would not have given the mortgage unless they were considered financially able to pay both.

OP, whose name is the house in? Is it in yours and your DH’s? I’m certain your dad will be unable to enforce what you are saying is in his contract. Just sell up, pay him the money back and let him take you to court.

Presumably when you purchased your property with your loan from your dad the solicitors would have checked the source of this wealth and been happy with it. Did you declare it as a loan at the time or say it was your money?

Absolutely. I was talking just in cash flow terms, lots of people would struggle to find the money to pay 2 loans each month on top of their mortgage. And the OP is where she is now, if it’s a struggle it’s a struggle. Interest rates on her mortgage might have increased since she bought etc. I feel like she’s getting a pretty brutal reception that’s a bit over the top.

I dunno, her dad's potential tax issues aren't her business, especially if she's committed mortgage fraud in not declaring the money as a loan to her lender. Maybe the apple didn't fall far from the tree!

Yes, and no. I know what you are saying, and one part of the law agrees, however it isn't that straight forward as there is also a rule that states £3000 gift in any tax year. As you say though, if 7 years have already passed, it is likely to be free of being considered a potentially exempt transfer.

From your description, it looks like an annuity type of structure or perpetual bond. That the £200,000 investment (from your dad's perspective) gives him perpetual monthly income of £600. Or 3.6% annualised return.

What does the contract say exactly? Perpetual income till father dies - which makes it more like an annuity or father can pass on/sell the right - which makes it like a perpetual bond.

Read the contract again or ask a lawyer to explain it to you if you dont feel like sharing the wording on MN.

Your father's tax situation is not your business. But if you think its an option to explore so you can gain leverage to get yourself out of the contract, you can try but need to tread with care. Thats your family relationship there. And there could be legal implications.

You have both a mortgage AND a £200k loan on your property. Where on earth do you live that you needed a property of that kind of value? And to do that you put yourself in debt to a "psychopath" (I assume that you are a practicing psychiatrist?)

Both you and your husband went in to this arrangement with a controlling psychopath with your eyes wide open. So sorry, but it seems that your concern is far more motivated by a desire to find a loophole so you don't have to pay the money back. But if you are that concerned about your fathers dealings, do remember to tell him that you don't want any inheritance when he dies, so he should leave it all to your brother.

OP - where was the contract drawn up? Here or overseas?

How Much has the house increased in value since you bought it? Could you sell, repay the 200k and then use the remaining equity to buy something cheaper?

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

I suspect OP was hoping to come here and have her feelings that she should be entitled to this money as an outright gift validated. Hence mentioning her father’s many other assets and savings - which blow the theory re means tested benefits into the wind.

Whereas in reality, this a generous loan from her father and it’s not garnered the sympathy OP was hoping for.

Drawn up on the back of a fag pocket.

You were under no obligation to take his loan or sign his contract. But presumably you wanted a house £200k above your means?

I would disagree with some of the things that you say.

"£200k to you means it's outside of his estate, wouldn't be taken into account for IHT"

That would be the situation if it really was a "gift". But here there is a paper trail that it is a loan and there are regular repayments. In this situation the £200k is still an asset of the father and so would be taken into account for IHT purposes.
.

"You're then paying it back at £600 per month. Your dad is smart, there is an IHT exemption for any level of gift as long as it's regular income and as long as it doesn't affect your standard of living significantly. So, the repayments are tax free for him"

You have this the wrong way round. You are talking about the exemption for "normal expenditure out of income".

As you say, in the UK you you can make regular payments of gifts to another person and there’s no limit to how much you can give tax free, as long as you can afford the payments after meeting your usual living costs and also you pay from your regular income.

In this situation, it would be the OP that is making regular payments to her father. So it would be the OP's estate who would benefit from this if she were to die within seven years - not her father.

"So, the repayments are tax free for him"

They are tax free regardless (assuming there is no interest). If the payments were genuinely a gift to him from his daughter of £600 per month then they would be tax free for him regardless (well, unless the OP died within seven years and the OP had made very large gifts prior to this).

If they are repayments of a loan then return of capital is not taxable. You do not pay tax when you get your own money returned to you. But there would be tax to pay on any interest.

At most, I would guess this is a move to avoid any future care home fees.

Sell it and let him sue you

If you also have a mortgage, surely that's because you needed over & above the £200k to buy the house? In which case it's still an incredible deal to get such a chunk of your mortgage interest free. Even if you decide to sell & buy something else, you benefit as that equity is in the house so you will still be better off paying Dad back monthly than if you had it all mortgaged.

What's he suing for? If he's paid back, there's no loss. Ergo nothing to sue for.

What are the terms of the loan @emmalinewre ? Is there interest? How much was it for and over what period will it be paid back? Did you have legal advice before signing it and is it registered against the deeds?

I find it hard to believe any mortgage company would’ve been happy with terms that prevent you from selling, what if you need to move?

How could he stop you selling? Is his name on the deeds?

Someone who knows more may be able to clarify but the only potential tax avoidance I can see would be that he's got £400k less in savings so less interest coming in to pay tax on. However that is replaced by £1200pm from you & sibling so can't imagine he was getting more interest/return on investment than that unless he has substantially more saved over & above that.