private loan

[aveciaqm]

Hi can somebody please advise me . My son is about to purchase a business franchise and I intend to loan him the capital required ,which will be paid back monthly over 5 years from year 2.Will the tax man recognise this as a business operating cost in the same way that a bank loan would be treated? Do I need to formalise the arrangements in any way?
many thanks

[pawncob]

Yes you should have a loan agreement.

Ony the interest element is tax deductible, so if it's interest free and he only repays the capital, no deduction is due.

[Incredulum]

And don't forget you're subject to income tax on the interest you receive.

[section 44]

In short, there should be symmetry. If your son obtains a tax deduction for the interest paid then you will be taxed on the interest received.

Whether or not this is tax advantageous (considering both of you) will depend on whether one of you pays tax at a higher marginal rate than the other. If you pay tax at a higher marginal rate than your son than it is disadvantageous. If your son pays tax at the higher marginal rate than you then it is advantageous. If you both pay tax at the same marginal rate then it is neutral.

[Incredulum]

In short, there should be symmetry. If your son obtains a tax deduction for the interest paid then you will be taxed on the interest received.

I'm interested that you think that even if interest is paid, there is an argument that it can be treated as neither taxable nor deductible. Would you mind saying a little more on this please?

[TEAP]

Watch out for the trap

You lend money at interest and the interest is taxable on you. However if you have to borrow to lend the interest you are still taxable on any interest received however YOU cannot claim a deduction for the interest paid against your own income tax
regards and hope that it helps
bill@taxenquiryadvice.com
www.taxenquiryadvice.com