Money Lending Between Family Members

[susanxx]

I am looking to help my sister in buying a house with a loan of £40k. I am not asking for interest just the money back when she has disposed of her current abode. What implications does this have, if any, with the inland revenue and what is the best way to prove she owes me the money other than involving solicitors?

[grasscarp]

No reason for inland revenue to know or be interested. I would get her to sign and iou. How you give her the money will be proof of your having given it to her and the transaction will (presumably) be there in your bank account.

[emmie]

i would say don;t do it, at least not without the aid of a professional such as a solicitor, matters can get very ugly where money between families is concerned, and not having a professional to draw up the papers is in my opinion asking for trouble.

[tamborine]

Have your name added to hers on mortgage

[Buenchico]

A simple signed (and preferably witnessed) document would suffice to prove that the money was a loan, rather than a gift:
"I acknowledge receipt of the sum of forty thousands pounds from my sister Susan as an interest-free loan loan to be repaid upon the sale of my property at 42a Acacia Avenue, Little Boggit, Hampshire"

As long as it's clear that the money is a loan then it remains part of your estate for Inheritance Tax purposes if you were to die before it was repaid (as it would anyway, even if it was a gift, if you were to die within 7 years). As there's no interest, the loan doesn't affect either your income or that of your sister, so there would seem to be no implications with regard to Income Tax. Similarly, as there's no 'gain', I can't see that Capital Gains Tax would apply. Therefore I assume that HMRC would have no interest whatsoever in the loan.

[EDDIE51]

3 pieces of paper each with the details on signed by both of you and a witness with a copy for each should be fine.

[stewey]

Chris, could there not be land-mines hiding in the phrase "repaid upon the sale of my property..."? When repaid: immediately; within a year; within 5 years: within 10 years...and so on.

[Buenchico]

It definitely needs some reference to a time period, Stewey. (There have been several posts on AB from people who've lent money to friends or family members without specifying when it should be paid back. That makes legal action to pursue it extremely difficult).

I suggested "upon the sale of my property" as the best wording to fit in with Susanxx's circumstances and assumed that she trusted her sister to actually sell the house (rather than just living in it and keeping the money).

If there's any element of distrust then it might make more sense to make the loan for a defined period (which can be extended, by using a new document, if there are difficulties in selling the house). But if you don't trust the person you're considering lending £40k to you probably shouldn't be lending it anyway!

[Peter Pedant]

Yeah I do this quite a lot - if no interest is involved then the tax man is not interested (ha! pun intended) as there is no unearned income.

There is no reason why you and she should not sign a piece of paper - that says Loan note: Amelia Money lender lens Beatrice Borrower exks pounds until such time as XYZ ( house sale) occurs.

and you both hold a copy.

I would go for a percent - so there is not interest but something at the end which you then have to declare as capital gains. { x pounds which is 10% of the property and on sale of the property the amount payable is 10% of the c gross/net amount ]

You have to write something in case one of you dies. Her execs if she is the dead one have to put you to proof of the debt as part of their duties. You have to make sure your execs if you are the dead one will continue the loan ( or else your death will precipitate the sale of you sister's house which may well not be your intention.

oops sorry I have just re-read your post - it is shortish term and so you dont have to go for a percent.

and of course as others have said if you really think there is a poss that she will pockjet the money and say at t the end of the day - what loan ?
then dont offer !

[Peter Pedant]

Oh Declaration of interest - I have a lethal diagnosis and so it is ridiculous for me to say to my lucky lucky potential heirs - you will have to wait until I die to enjoy any of your well deserved mookah !

[ToraToraTora]

to protect yourself fully you want a charge on the property concerned.

[Peter Pedant]

I think all the advice here merits best answers. ..... because
they recognise that if you have some doubt about whether you will get the loan back - then dont do it.


[ one of my relations borowed £1000 off an aunt in 1965 ( lot of money ) and didnt repay it as he treated it as a gift and as a result all his brothers were disinherited..... ] oops

[susanxx]

thanks guys for all your responses. They have been noted and I am confident that by implementing most of the answers into one document then there should be no pitfalls with our agreement.

[ToraToraTora]

yes but that alone will not get the money repaid if this goes sour. You need a legal charge.

[modeller]

Above all else there should be a time limit. If after that period you wanted to give her more time that can be new separate agreement.

[ToraToraTora]

I repeat, no doumentation will get your money back, well not without a long and tiresome expensive legal battle. What if she decides that she likes having your 40k, sadly this happens all the time in families. Get a charge on her current "abode". If she wants your 40k she'll agree to it.

[Peter Pedant]

hmm, think about a time limit.

You see if in a perfect world - you lend 40k for eight y (limit by time geddit ?)
then the prudent borrower should accumulate 5k in the first y and then another in the second - so it works out by year 6 that there is a float of £30k which neither of you can do anything with - she cant invest at a risk
and if the loan is honoured you dont get your hands on the moolah for another two years.

Just a thought

[Old_Jim]

If no interest is involved, there are no tax implications. The best approach is an exchange of letters.
1) Dear Sister. I'm lending you £40K. I expect you to repay this when you have sold your house at...
2) Dear Brother. I am pleased to accept your offer of £40K. I undertake to repay this immediately after I receive the proceeds of selling my house at... I will use my best endeavours to sell the house without unreasonable delay.
Only in more formal language.
Courts are generally reluctant to get involved in family finances where it's unclear whether money is a loan or a gift. However, the letters will make things clear if your sister keeps your money plus both houses.

[FredPuli43]

Still think, given the amount and that property is involved, the best course is to have a charge on the property,just as a bank which gave a mortgage to buy a property would take. Then there is no doubt that the money is there nor what it was for, and assuming there is £40k in the equity in the property (unlikely not to be the case) the money is all safe. A solicitor would do the paperwork and not charge much, so you are certain everything is done correctly.