Tax implications when loaning children money to buy a house - USERNAME: Matrix - 15/04/2014

Tax Question:

Dear,

I would be grateful if you could answer the following 4 queries.

Assume I loan my two working age children capital to buy a house as joint tenants; in which both they and my wife and I will all live together. The capital interest being repayable when the property is sold.

On subsequent sale:

1) Will I need to pay tax on the interest? 2) If so at what rate? 3) Any way the interest can be reduced? 4) OR Cannot the children simply give the house back to me so I can then sell it under PER seeing as I initially funded the whole purchase?

Thanks in advance for your reply.

Answer:

1) Will I need to pay tax on the interest?

If you loan funds and charge interest the interest would be taxable.

2) If so at what rate?

It would be at your marginal rate (ie 20%, 40% or 45%).

3) Any way the interest can be reduced?

There are no deductions permitted from the interest, therefore to avoid the tax charge you would need to avoid charging interest. Note if the loan was from a company the deductions are wider.

4) OR Cannot the children simply give the house back to me so I can then sell it under PER seeing as I initially funded the whole purchase?

The children could transfer the property back. There shouldn't be a CGT charge on the transfer if they occupied the whole property as a main residence. The funding of the purchase shouldn't impact on the PPR position providing they have the beneficial ownership of the property.

One issue could be if the property is only partly occupied by the owners. This could lead to a PPR restriction for them given they don't occupy the full property.