Borrowing & Lending Between Family & Friends

Could someone just clear up a grey area for me, hypothetical situation;

Person A – No assets.
Person B – Estate of about £1M

Person B wishes to give Person A a loan of £100k, Person A will pay this loan back in full, with no interest, in two years time.

Person A will make a profit from this loan of £75k

The profit will be made from the construction of a house, Person A will live in that house for one year to avoid/reduce capital gains and income tax.

Can anyone suggest any shortfalls in this plan, death… inheritance tax etc…

Thanks, any more info just let me know. Person A intends to see an accountant about this but wants to understand the basics.

Be prepared to lose it & accept it was a gift not a loan

It depends which constituency Person B is MP for.

It depends which constituency Person B is MP for.

😀

Can anyone suggest any shortfalls in this plan,

Person A borrows 100k.
Building goes way over budget due to unforeseen building problems.
Housing market falls further when interest rates rise again.
Person A left in negative equity unable to pay original loan back.

Apart from that nowt!

What happens to Person B if Person A says **** off at the end

What happens in Person A doesn’t complet house and pisses it up a wall

What happens if Person B loses 1M estate on a poker game and needs 100K ASAP

Surly there are lots of tax implications

What happens if house prices crash further (unlikely but you never know) and the house is only worth 50p and a bag of grapes

Just for staters

I thought you could only ‘gift’ away about 7,000 a year to one person from a tax point of view.

Surely if the ‘loan’ has no documents to go with it the taxman is going to class it as an income for Person A and attempt to tax if they find out aren’t they?

Thanks for the feedback, I will start again though;

Building goes way over budget due to unforeseen building problems.

Not an issue, its a timber frame new build on my own land, pending planning. I am an architect too which helps. build cost should be £60k.

Housing market falls further when interest rates rise again.

Built in a National Park, it cant fall below £60k given precedent (£165k average) and if all goes to pot we could just keep it.

Person A left in negative equity unable to pay original loan back.

No loan repayments just a final sum as and when it can be paid. There would be no time scale.

For the record A is me, B is a family member.

Lend us a fiver

Surely if the ‘loan’ has no documents to go with it the taxman is going to class it as an income for Person A and attempt to tax if they find out aren’t they?

Thats what i am asking? loan or gift? I assume its only liable as part of inheritance tax should person B die…?

Its not a gift if it is over a certain amount IIRC?

“Building goes way over budget due to unforeseen building problems.”

Not an issue, its a timber frame new build on my own land, pending planning. I am an architect too which helps. build cost should be £60k.

Ha ha ha ha ha ha ha ha

Get proper documentation drawn up

TJ – Oh oracle of all knowledge, please enlighten me? are you suggesting i don’t know how to build a house? would you like to see some examples?

I’ll admit I know very little about tax, thus the question.

Its not a gift if it is over a certain amount IIRC?

Just googled it;

There is no limit to gifts, however if you where to die within 7 years of giving it, it would be included in your estate for potential IHT.

Mtt – none of your houses you have built go over budget or overtime?

The proper documentation was for the loan – get it drawn up legally.

Not over budget no. It’s as a consequence of Sarah Beeney’s programs (and similar) that people think all building projects run over time and budget, it normally starts at the point they jettison the architect.

Time not being an issue and no mortgage payments also helps.

The proper documentation was for the loan – get it drawn up legally.

It may be easier to call it a gift, from what i have been reading anyway.

There is no limit to gifts, however if you where to die within 7 years of giving it, it would be included in your estate for potential IHT.

is that for an immediate (family) relation or anyone?

Nowt to do with owt on TV – just my experience of architects.

You need documentation in case of arguments later – get it watertight.

have you had a look here about gifts?

http://www.hmrc.gov.uk/inheritancetax/pass-money-property/exempt-gifts.htm

Person B speaks Italian and asks for Money back early.

Be prepared to lose it & accept it was a gift not a loan

Totally agree otherwise draw up an agreement with your Solicitor.

Even if its your own land, planning will be very difficult in a National Park.

HackneyRider – yes, cheers.

Teetosugars – I agree, it stands a good chance though; within village boundary, fits with LDF, some favourable precedent.

TandemJeremy – i remember reading something you posted about a listed building…? was that you?

mtt – does this mean a silvery cedar clad pavilion then? You’re not going to do a FAT on us are you?

Mtt – yup that was me – one of a number of instances of trouble with architects.

Original estimate £400 000, cost now 1.3 million and rising – mainly due to the architects ego getting in the way of the job. Ugly mess, no planning applied for nor listed building consents etc

TJ – you can’t tar all architects with same brush now, can you?

Pretty sure you can “gift” to anyone, if the person “gifting” dies then it will just use the first £100k of the tax free IHT allowance (roughly £300k) along with any other gifts made in the 7 year period. Assuming the other gifts are minimal you won’t owe any tax if they die but you might not be overly popular with the people left the assets in the will as they’ll end up paying more tax… However if they have assets of >£1m I would expect they are all over IHT planning anyway…?

Pretty sure you can “gift” to anyone, if the person “gifting” dies then it will just use the first £100k of the tax free IHT allowance (roughly £300k) along with any other gifts made in the 7 year period. Assuming the other gifts are minimal you won’t owe any tax if they die but you might not be overly popular with the people left the assets in the will as they’ll end up paying more tax… However if they have assets of >£1m I would expect they are all over IHT planning anyway…?

you may have to convince HMRC you are not “carrying on a trade” though…

lol @ aP

Are you new here?

rule one of STW, dont talk about STW
rule two of STW, dont talk about STW
rule three of STW, TJ has an oppinion on everything, it is never wrong

Agree with the OP though, there’s very little to go wrong in a timber build so not likely to go over budget? Even on Grand Designs etc the timber/modular builds only go over budget by what would normaly be covered in a contingency plan, and nearly every ‘over budget’ project is because you changed the scope mid way through after setting the budget.

Sounds a fair enough financial arrangement, maybe check with an accountant to make sure HMRC won’t stiff you for it and you know your family better than I, they seem quite happy with the risk?

best way to get planning in the Brecon Beacons National Park is to sleep with the planners, although they seem to have reviewed that practice and now say no to pretty much everything

TJ has an oppinion on everything, it is never wrong

Not on everything 🙂

On architects – I have had dealings with 4 all of whom have made major and basic errors

Back to the OP – I really feel very strongly is that you must get a proper legal agreement for the monies – and not a “gift” with the understanding you will pay it back. Recipe for disaster if something goes wrong – and with families and with buildings things can go wrong. Its worth the few quid that will cost to get a binding agreement.

Some excellent advice thanks.

TandemJeremy – Probably good advice and definitely something I will look at.

colwyn58 – “carrying on a trade” – Thanks for the pointer <googles>

I am at the point of discounting aP’s contributions having read his opinions on HRH Lance Armstrong, so I wont address him directly. Needless to say he can keep his cedar clad pavilion and i will raise him a team of Bartlett Postgrads working up a syntax based emergent concept that will only ever work on the computer. 😉

Ohhh – architect bitchfight!

mtt – Neoplasmatic Design maybe? One of the AD authors works in my office. I trust that the pagoda will have a sauna and plunge pool?

and TJ – sheesh 🙄 – not going to make it up to the IHF exhibition unfortunately.