Dad lending me deposit, can I claim interest

by **madmum** on Sun Mar 14, 2010 2:07 am

Hi Dad is lending me a sizable sum so I can take advantage of the 60%LTV deals on a BTL. I will reimburse him the 2.75% interest he will forgo as well as the capital sum in due course or more likely on sale of the property.

Can I claim the interest payments against income tax, it is wholly for the purchase of a BTL, and definatley a loan and not some inheritance tax dodge.

by **mullet** on Sun Mar 14, 2010 3:01 pm

Yes the interest will be deductible against property income if it is wholly and exclusively for the purposes of the rental business. The obvious point here is that interest charged is not at a stupidly high rate. But remember that the interest received will form part of your father's taxable income.

by **madmum** on Sun Mar 14, 2010 7:04 pm

wow thanks for the reply, very useful, he will charge me what he would have got in the bank, do we need a formal agreement for this or just a spreadsheet, do you know.

by **Peter D** on Sun Mar 14, 2010 7:20 pm

You need to write it down and form an agreement signed by both parties and ideally a witness. Again remember that he will have to declare the interest on his annual tax return so this cost of tax ought to be included in the % he charges you. Ensure it is all traceable and there is a paper trail. Regards Peter

by **Incredulum** on Mon Mar 15, 2010 12:51 pm

& you should probably withhold basic rate income tax on the interest and you have to send that to HMRC.

by **pawncob** on Mon Mar 15, 2010 6:45 pm

Is tax deduction really necessary?
http://www.hmrc.gov.uk/manuals/saimmanual/SAIM9060.htm

by **Incredulum** on Tue Mar 16, 2010 1:06 pm

A good question. To which I don't know the answer.

s728 only applies to payments made for commercial reasons in connection with the individual's trade, profession or vocation.

But s272 states the profits of a property business are calculated in the same way as the profits of a trade. Which suggests that payments made in connection with the property business may well be.

Only the provisions of Part 2 are restricted to those specifically listed in 272(2); and interest is in Part 6 so doesn't get restricted by subsection (2) so I think it possibly does.

Although there's a good argument to say that s728 has nothing whatever to do with calculating the profits of the property business (but rather to taxing the profits of a business lending money to a property business) therefore s272 (1) doesn't bring it into the scope of a property business.

That said, s728 is entitled "commercial payments" which appears to be all encompassing, although, of course, headings are non-statutory.