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So I have a fairly big mortgage and a family member of mine has a fairly large sum of cash.

As he doesn't want to invest in any investments, it's just sitting there in the bank gaining interest in which he is taxed. At the same time, I have this mortgage in which a sizeable chunk of my payment is interest.

I was thinking as my bank allows me to open multiple offset accounts. I was thinking if I can open one up for him - he then puts the money in there. He can take the money out whenever he likes - but every month, I pay him interest for the money he has in there.

Thereby, we both benefit. He doesn't have to pay tax and I pay a lower interest rate (as his savings interest rate would be less than my mortgage interest rate).

Just wondering - will this work and is this legal? I figure surely, it can't be illegal for him to lend me money surely but does he technically have to pay tax on the extra "interest" payments I'm giving him?

The whole thing will be informal. We're a close family and there's absolutely no issue regarding trust. We've also got steady jobs and I am well ahead on my mortgage too. It's more about "if I have to pay interest, I'd rather pay family, rather than a bank"

If it helps - I'm in Australia.

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    It may not be illegal in principle but require lots of paperwork you couldn't even begin to fathom to make it officially legal. Expect tax and money laundering investigators to give you some attention...
    – Michael Borgwardt
    Aug 13 '14 at 9:29
  • @MichaelBorgwardt : What kind of paperwork are you talking about? The OP has specified it's an informal loan without any paperwork - family members lend each other money all the time. How would that trigger any sort of investigation?
    – Joe.E
    Aug 13 '14 at 10:55
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    @Joe.E: anything "informal" involving 6 figure sums practically screams money laundering or tax evasion. Loans are typically a highly regulated business, and just because it's between family members doesn't mean no laws and regulations apply.
    – Michael Borgwardt
    Aug 13 '14 at 11:09
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    @MichaelBorgwardt : I find it an exaggeration that it "screams money laundering or tax evasion". It’s probably not even an uncommon scenario - plenty of parents gift or lend their kid’s money to buy their first house. Esp. with the house prices as they have been. This isn’t illegal and very unlikely for any of these transactions to have formal contracts drawn.
    – Joe.E
    Aug 13 '14 at 12:56
  • If the offset account is in "your name", how can Uncle Joe take his money out at any time without your consent? And if the bank is paying you interest on that pot of money which is in your name, why is it not taxable income to you? If you are paying interest to Uncle Joe out of your own cash on hand and it is going into an account with his name on it, how is it not income to him?
    – Dilip Sarwate
    Sep 12 '14 at 11:38
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I can't vouch for Australian law, but in the US there is actually a recognized mechanism for "in-family loans" which ensures that it's all fully documented for tax purposes, including filing it as an official second mortgage. (Just did that recently in my own family, which is why I'm aware of it.) We're required to charge at least some interest (there's a minimum set, currently around 0.3%), and the interest is taxable income, and it is wise to get a lawyer to draw up the paperwork (there are a few services which specialize in this, charging a flat fee of about US$700 if the loan is standard enough that they can handle it as fill-in-the-blank), but outside of that it's pretty painless.

This can also be used as a way of shifting gift limits from year to year -- if you issue a loan, and then gift the recipient with the payments each year (including the payments), you've effectively spread the immediate transfer of money over multiple years of taxes. Of course it does cost you the legal paperwork and the tax in the interest (which they're still "paying" out of your gift), but it can be a useful tool, and it's one that wasn't well known until recently.

Again: This is all US codes, posted only for comparison (and for the benefit of US readers). It may be completely irrelevant. But it may be worth investigating whether Oz has something similar.

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This answer is specifically for the UK, but one building society has an account set up specifically for this. You actually refer your friend/family member to set up an account and then it can be linked to your mortgage. They don't get any interest for their account as it's all offset against your mortgage. If you then happen to give them a cash gift (up to £250 or possibly £3000 per year, I can't work out which is the reliable number, as of 2015) then it's all completely above board.

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A revocable trust? Else the title would be his...vs recieving a gift that large. Make it a business investment like a holding company. And use the trust as agreement to shares.

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