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!

if I’ve got this right, he had lent you the money, and you need to pay him £600 per month. You cannot sell it and give him a lump sum? In that case, you could sell it, put the money in a high interest account and then have £600 transferred to him each month from that account.

Yes, this it the crux of it.

If you mean you feel stuck (want to go travelling or something) then sell up and repay the loan.

I'd bet money this 'contract' isn't worth the paper it's printed on.

If you had a solicitor who said it looked suspicious, I'd hazard that the terms are either unlawful or untenable. Just because someone has a contract doesn't necessarily mean that contract is enforceable if the terms are unreasonable.

What are the penalties for breaking the contract and how would he enforce them?

It’s very strange you can’t end the monthly payments by paying him back the total owed. If you want out of the agreement best save and see the solicitor who told you it looks suspect.

I agree that if, and it’s a big if, the contract exists it’s unenforceable in the way described. No bank would agree to mortgage a property without the ability for them to force a sale, or for them to be a second charge behind a related party loan.

How did you ever think it was a good idea to borrow money on these terms from someone you consider to be "a bit of a psychopath"?

I don't really see how this "contract" you've signed can stop you selling the house if it's your house. If you sold the house you could give him the money back, still £600 a month if that's what he wants, but you'd have the money there to do it. Then buy somewhere cheaper with your mortgage.

@emmalinewre - so when the solicitor advised that it looked suspicious, why did you proceed?

But is that enforceable?

What if you needed to move for work, bigger house for family, just because a nicer house came up in a better area, downsize,whatever reason?

I cant imagine being stuck in the same house for 30 years on the say so of someone else. On the face of it it seems very unreasonable and unrealistic and therefore unenforceable.
Get yourself a solicitor to look at the contract.

Check the terms of the contract you have with him are legally enforceable.

Terms of contracts mean nothing if they can't be enforced by a court.
You may find the clause that you sell is not a valid clause.

I would pay to have a solicitor look into it for you.

You keep saying this, but you’re completely ignoring the fact that without the £200k from your dad, the mortgage would be a lot bigger and more expensive (or the house would be a lot smaller or in a much cheaper area).

It feels like you’re crying, “Waaaahhhh! I’ve got to find £600 on top of my mortgage; it’s really hard!”, when actually that £600 is just part of your housing costs.

Suspect OP also benefited from a preferential interest rate too due to having a significant deposit.

Plus how will he make you continue to live there? What about renting it out?

Does your mortgage company know that the £200k was a loan that your are paying back additionally to theirs? If you didn’t tell them that this is where the deposit was coming from you may have committed fraud yourself (& I can’t believe they didn’t even question it - there is so much affordability testing required now). Did your Dad choose the property? If not why did you not buy something cheaper? Whose names are on the deeds? Get a decent solicitor to check out what you’ve signed and also make sure you didn’t pull the wool over your mortgage company’s eyes either - or you could end up in the 💩 too!

I think OP is saying he won’t let them sell it in order to repay the loan, not that he won’t let them sell it full stop. That would indeed be unenforceable.

If OP was that worried about these repayments she’d sell up and buy somewhere smaller/cheaper to reduce her mortgage payments. But I suspect she doesn’t want to do that and was hoping we’d all tell her to stop paying because it’s “dodgy”.

I'm not sure that this is enforceable. If you were to sell up and pay him back, what is going to sue you for? He wouldn't have suffered any damage. After all, if for some reason he wants regular payments rather than the lump sum, he could just put it into a pension or annuity.

The thing that rings alarm bells is the words "ongoing basis" - is there an expectation that this continues until he dies? Even if he lives another 50 years?

If it was an interest free loan you would have repaid after 27y9mo and if that fulfills your obligations you would have a very good deal. But presumably interest free isn't specified in the contract you have signed and you are locked in.

If you had borrowed £200,000 with an annual interest rate of 3.6% or more then the interest alone would be £600 a month or more.

This isn't fraud or tax avoidance but what would have been fraud would be if you had declared to the mortgage company that the £200,000 capital you were putting down was your own funds without obligation. If you didn't declare it as a loan then you obtained an unaffordable mortgage under false pretences and now that higher interest rates are beginning to bite the affordability criteria that would have protected you from borrowing more than you could afford are the thing that would have saved you this grief.

The one thing that could possibly be changed would be if you took him to court to dispute the unfair term that there is no buyout or possibility of termination. The court could rule that an unfair term and insist that he allows you a buyout. However if the court requires that the buyout gives him at least Bank of England base-rate on his money, which would be perfectly reasonable, you will owe him a lot more than £200,000 and I suspect it would bankrupt you. The mortgage company would probably also foreclose on your mortgage if they find that your deposit was a family loan.

Sell the house put £200k in a seperate bank account and set up a monthly direct debit to your dad. That’s him paid off forever then and you don’t have to worry about it.
Then get a full mortgage on a new house sorted and pay the bank the money back plus interest.

At today’s interest rates you’d be looking to pay 800-850 pounds a month on a 200k loan, interest only. The 600 you pay each month amounts to 7.2k a year, which is only 3.6%.
So unless interest rates drop by a couple of points, it does sound like the current situation is advantageous to you and your husband.
is your father ever expecting you to repay the 200k?
And if not, for how long will the 600 pound monthly payments continue?
If I were your father and looking to make maximum income out of 200k, I could easily make 5-10% return on my money, at the 5% end with pretty low risk, at the 10% end of things with a bit more risk.
So I guess overall it seems fairly advantageous to you, especially if there is no expectation for you to repay the full 200k at the end (but even then it would be a fairly cheap loan in today’s interest rate environment)

When we lent our DC a similar amount we had to sign paperwork to say it was a gift and wasn't to be paid back.

Was your contract signed where solicitors were involved?

What exactly is your father going to do if you do sell?

Nothing to stop you selling, banking the outstanding balance you owe him and continuing to pay £600 monthly.

Can’t imagine he will take legal action for breach of contract, given legal fees etc….

• to win, he has to prove loss, if he has the money it can be re- invested, there is no loss….and actually he could earn more than 600 quid a month on 200k
• if it was a ‘dodgy’ situation, he is hardly going to issue proceedings.

Yes, well, accepting suspicious loans from psychopaths is never a very good route to take.

Best of luck with it all, OP

But the OP’s mortgage will be significantly smaller than it would have been without the £200k. And imagine the cost if she’d had to borrow that £200k from a mortgage lender - if she could even find one who’d lend her that kind of sum.

Of course lots of people would struggle to pay a £200k loan on top of their mortgage. But those people wouldn’t have had a £200k deposit.

If the house is in your name, then this is unenforceable and you can safely ignore this contract clause and sell the house.

re Dubai bank account - I had a flat there and had a bank account for 10 years and was under the impression you have to be resident and own/rent property there and/or have business or job there to get bank account.

You went ahead and accepted the loan despite having been told it looked dodgy.
You describe the loan repayments as a "burden" and "a lot of money a month to find", but you don’t seem to view your mortgage repayments in the same way. Perhaps you need to renegotiate your mortgage so you pay less per month, over a longer term.

I'm not clear what outcome you want. If you were told that his actions were definitely dodgy/illegal, what would you do about it?

If you’re hoping to keep the loan, not keep making the repayments, and don’t care about keeping a good relationship with your father, you could get a legal opinion on whether the contract you presumably signed with him (or an oral contract) is legally enforceable.