Loan from family

[Stephanie4]

Hi - does anyone have a view on how the inland revenue views a loan from family used to buy a rental property?
Can I subtract the interest I pay from my tax bill or is that viewed with suspicion because the loan is not from a commercial entity? (Obviously my father, who lent me the money, would declare it on his tax return - so it's not as if the IR wouldn't get the money...)

[King_Maker]

Provided a reasonable interest rate is used, it is unlikely that HMRC would object.

[wamstax]

OK but can I just put in place a word of caution. I assume that the loan is being properly provided from your father's properly accumulated and taxed finances. If so probably no problem but in any family related transaction it is always possible that somebody, even an open minded tax inspector, might think that its your own undeclared earnings being routed back to you under the guise of a loan. I realise that it might be all above board but your question about suspicion just started me thinking and money laundering nowadays is very high profile.

[Stephanie4]

Yes, it is all above board from that point of view - though a bit more complicated than stated in my original email (I was trying to keep things simple)...I am trying to decide between a family loan and a commercial mortgage - and it would be nice to be fully confident of how the IR would view the former before proceeding with it. I am thinking of contacting them directly, for an answer but don't know how helpful they are, or how definitive any advice they give me would be...

[wamstax]

That's the trouble with these type of problems they are always a bit more complicated than at first put over. That would be the exact reason that you would have to fully lay out every possible complication if you decided to approach the HMRC. I am also not sure what you expect HMRC to give you and the response might vary depending on what level of officer received your request. Basically there is nothing objectionable in you obtaining a loan at a slightly preferential rate but you could always be remotely susceptible to someone applying transfer pricing considerations or settlements legislation (if you are a minor)to the rate charged on both you and your father if they found whatever you did objectionable. Inevitably we do not know the personal and financial and business/company status of yourself and your father and apart from the potential exposure to HMRC enquiries of each family member involved there is little difference taxwise as long as everything is properly documented and recorded and the rate was a virtually proper commercial rate of interest. Hope this helps but think you should speak to a professional adviser.

Bill S
bill@wamstaxltd.com

[King_Maker]

You are unlikely to get any advice from HMRC - that is not its function - nor is the "advice" given necessarily binding on HMRC.

If the difference in cost, after tax relief, is not that great, a commercial loan might be better option - less hassle if a family disagreement occurs.