Tax implications of a loan from my brother?
Tax implications of a loan from my brother?
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Discussion

mechsympathy

Original Poster:

58,743 posts

285 months

Friday 10th October 2008
quotequote all
Sorry, yet another badly disguised "how do I protect some money" thread.

My brother sold a flat and has the money sat in a bank account. Obviously he's a little nervous about it at the moment and needs to spread it about. The major problem with this being that he lives in France and can't open any UK bank accounts.

He's planning to return to the UK in the next year or so and with the Euro rate as it is doesn't want to transfer the money over there.

I've suggested that he puts the money (£100ishk) in my offset mortgage account and I'll pay him interest.

Now, I can't see any disadvantages to this. Clearly he will need to declare the interest to the nice taxman wink but am I likely to be liable in anyway for what is effectively a loan??

mechsympathy

Original Poster:

58,743 posts

285 months

Friday 10th October 2008
quotequote all
tumbleweed

Perhaps I should have put it in the business section...frown

Tom_C76

1,923 posts

218 months

Friday 10th October 2008
quotequote all
Provided you pay him a rate of interest agreed why should you have a tax liability? It's not like a preferential rate load from your employer is it? Make the interest rate sensible though, just to be on the safe side, and be prepared for a spanish inquisition to make sure you're not laundering money...

Welshbeef

49,633 posts

228 months

Friday 10th October 2008
quotequote all
The thing is your bother will now need to fill in a UK self assesment form and one in france for this additional income.

Once you start with the self assesment form they keep coming year on year even if there is nil to fill in.

So he will be taxed on the interest you pay him

mechsympathy

Original Poster:

58,743 posts

285 months

Friday 10th October 2008
quotequote all
Tom_C76 said:
Provided you pay him a rate of interest agreed why should you have a tax liability?
That's what I'd have thought, but I'd hate to have the IR come back a year or so down the line asking questions.

Welshbeef: He already (AFAIK) does a SA form.

97octane

2,203 posts

253 months

Friday 10th October 2008
quotequote all
As it is an offset mortgage account, I assume that means that you don't earn any interest (which would be taxed at source) but merely reduce the interest payments on the mortgage?

There is an alternative way of doing it - He could gift you the money (under inheritance tax rules) and you could then gift him back the money and gift him something in lieu of interest on top, when he needs it back. As it is a lump sum, and provided you both live the required seven years, both gifts would fall out of tax altogether.

Or I am as mad as a hatter and I've got that completely wrong!

mechsympathy

Original Poster:

58,743 posts

285 months

Friday 10th October 2008
quotequote all
97octane said:
As it is an offset mortgage account, I assume that means that you don't earn any interest (which would be taxed at source) but merely reduce the interest payments on the mortgage?
Correct. I intend to pay him interest equivalent to what we would have paid the bank.

97octane said:
There is an alternative way of doing it - He could gift you the money (under inheritance tax rules) and you could then gift him back the money and gift him something in lieu of interest on top, when he needs it back. As it is a lump sum, and provided you both live the required seven years, both gifts would fall out of tax altogether.

Or I am as mad as a hatter and I've got that completely wrong!
That seems right, if needlessly complicated. Possibly.

97octane

2,203 posts

253 months

Friday 10th October 2008
quotequote all
It isn't really complicated. Get him to write you a letter explaining that it is a gift. Job done. No lawyers required.

Welshbeef

49,633 posts

228 months

Friday 10th October 2008
quotequote all
97octane said:
It isn't really complicated. Get him to write you a letter explaining that it is a gift. Job done. No lawyers required.
But a gift doesnt have to be repaid - brotherly love or £100k in your coffars!!! Thats 100,000 lots of trust he has in you.


Only kidding - youd be a devious sod to even consider doing that.

mechsympathy

Original Poster:

58,743 posts

285 months

Friday 10th October 2008
quotequote all
97octane said:
It isn't really complicated. Get him to write you a letter explaining that it is a gift. Job done. No lawyers required.
scratchchinTrue. It wouldn't be any different for a loan though, shirley?

The other question is whether we might fall foul of money laundering regs.

Welshbeef

49,633 posts

228 months

Friday 10th October 2008
quotequote all
No a gift is tax free and can be of any amount & provided the gifter lives 7 years the receiver gets to keep it all tax free IF however the gifter dies at some point during those seven years part of it will be subject to inheritance tax.

This is how the very wealthy dont lose 40% of their assets every time they die as they have gifted it all away hence Inheritance tax is a non issue/so scrap it.

97octane

2,203 posts

253 months

Friday 10th October 2008
quotequote all
mechsympathy said:
97octane said:
It isn't really complicated. Get him to write you a letter explaining that it is a gift. Job done. No lawyers required.
scratchchinTrue. It wouldn't be any different for a loan though, shirley?

The other question is whether we might fall foul of money laundering regs.
But loaning someone money isn't illegal. The bit you are worried about is whether he pays tax on the interest you give him. All I'm saying is that if you treat it as a gift, by making it a one off payment to him at the end (or even at some unrelated time), then he can argue that it isn't interest or taxable.

mechsympathy

Original Poster:

58,743 posts

285 months

Friday 10th October 2008
quotequote all
Welshbeef said:
Stuff
Yep.

97octane said:
But loaning someone money isn't illegal. The bit you are worried about is whether he pays tax on the interest you give him. All I'm saying is that if you treat it as a gift, by making it a one off payment to him at the end (or even at some unrelated time), then he can argue that it isn't interest or taxable.
Gotcha. I'm thinking that linking the two together might be iffy. So it'd make sense for him to loan me the money, and when I give it back (or actually at some other time) I make him a giftscratchchin

Or am I now making it needlessly complicatedhehe