Tax implications on loan

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    Tax implications on loan

    I'm hoping to buy a house in my name, it will be the only property I own. I can fund 75% of the purchase and my brother is lending me the 25%.

    I will live in the house & hope to rent 2 rooms to friends under 'Rent a Room Scheme' & receive rent under the £7,500 a year (IE not have to declare as income)

    I will then repay my brother over a period of time from the rental & other income.

    1 Do you see complications in the above?

    2 If the house cost £180k, I funded £135k & my brother £45k. Can my brother receive the first £45k without declaring it as income as it's a repayment of a loan. If I then pay him more than £45k, how does he declare this 'interest'?
    Or would he be better to treat some of the repayment each year as interest? And would this then be included as part of his £1000 "Personal Saving Allowance" (he is a basic rate tax payer)

    Thanks in advance

    #2
    Hi

    1. Complications? Oh boy, lots of them. I would advise against loaning/borrowing money from family. What happens if you can't pay him back? What happens if he decides he needs the money? What happens if you then sell the house for a huge profit? Will he be happy with that? What if the worst happens and you were to die? Will he be accounted for in your will? etc etc.

    2. You can pay him back his £45k without him paying tax. If you are paying him interest he needs to declare that as income and pay tax appropriately. His problem, not yours.

    You should write it all down in an agreement. What you are borrowing, what you are paying back, how long you will take to pay it back, what proportion of a payment is capital and what is interest etc.

    I would really advise against this. Why could you not get a mortgage? You'd probably get some really good rates at that LTV and would save a lot of potential family grief.

    Comment


      #3
      1 - Not really unless there's a mortgage lender involved. I would get a solicitor to draft a proper loan agreement and advise your brother to take their own legal advice. If one of you dies before the loan is repaid that would avoid a mess.

      2 - If there's no interest, there's no income, the repayment of the principle of a loan isn't income and not an issue for tax. I don't think the interest on this kind of loan qualifies for the personal savings allowance (but it's not something I know that much about, so check with an adult). If you pay more than the principle, that's income and your brother should declare it having told HMRC when he starts to receive an additional source of income.
      When I post, I am expressing an opinion - feel free to disagree, I have been wrong before.
      Please don't act on my suggestions without checking with a grown-up (ideally some kind of expert).

      Comment


        #4
        I agree with the above - and maybe with the loan agreement which incorporated some sort of insurance , you never can anticipate what is round the corner for ,eg my son broke his hip and was unable to work will take him 3 years to get back to normal - your tenant might fail to pay ending up in arrears and there may be periods when you cant pay your brother when the property becomes empty between tenancies

        Comment


          #5
          Its probably better to have a "loan agreement" with annual interest payable fixed at say 2% ( or whatever rate agreed ) calculated on the balance owing at 5th April.

          Comment

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