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We are thinking to buy a house and our parents would like to help us with the deposit (as we don't own that sum). The idea is to give the money back someday.

Now the questions:

  • How do my parents give me the money?
  • Will I have to pay tax on that money?
  • When I give the money back, will my parents have to pay tax on the amount again?

Edit: my parents live abroad. If they transfer the money to a UK bank account to back the deposit, will they have to pay any tax?

2

If you receive a loan from your parents, it is treated legally just as a loan fom a bank, or from any private person with spare money. You don't pay tax on a loan that you get from your bank (or your parents), and the bank (or your parents) don't pay tax when you repay the loan. If you pay interest, the parents will have to pay tax on the interest, just like they would have to pay tax if the money was in their own bank account.

I would advice both you and your parents to make sure that a contract is signed saying that this is a loan, and how it is repaid, and that you follow the contract. Otherwise, if you or your parents treat the loan as an actual present, then you might have to pay tax, because there is tax due on gifts. And you might get a penalty for trying to avoid tax by declaring the gift as a loan. So pay the money back!

Only up to £3,000 in cash gifts that a person gives each year is tax free, but the parents can use any unused money from last year (so they can give a gift of £6,000 if they gave nothing in the previous year), and it is per parent, so both the mother and father can make a gift.

4

No, money transferred for a loan or a gift is not taxable. If you pay your parents interest, they'll have to pay tax on that. And if they give you money and then die within seven years, the gift may become liable for inheritance tax.

  • According to HM Revenue you do have to pay tax. – algiogia Apr 9 '15 at 15:32
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    @algiogia Not if the gift was within the tax-free limits (unlikely for a house deposit) or the overall estate was below the threshold for inheritance tax (which is pretty likely). That's why I say it may become liable for inheritance tax. – Mike Scott Apr 9 '15 at 15:38
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    Note also that a loan is not a gift. If you have a proper loan agreement, then it wouldn't be liable for inheritance tax anyway. Although it would have to be repaid to the estate in line with the terms of the agreement. – Mike Scott Apr 9 '15 at 15:42
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It would be worthwhile reading into 'guarantor mortgages' or 'family offset mortgages' to achieve the same outcome. Ideally you are wanting the wealth of your parents to help make a mortgage more accessible to you. The first thought is to merely transfer money physically. However, for the reasons listed in the other posts, this carries potential problems.

A guarantor mortgage will mean your parents agree to pay the portion about 75% LTV if you stop paying. You may take out a 95% LTV mortgage and therefore only have to find 5% deposit but benefit from the interest rates of a 75% loan. (Personally the chances of causing a family rift if things go pear-shaped would steer me away from this one. Each to their own though.)

A family offset mortgage involves money rather than a guarantee. It will allow for the parents to dedicate some of their money to a third-party (ie. the bank or building society) so that you can achieve a mortgage. In practice, parents deposit money in a dedicated savings account. The bank adds that amount to whatever deposit you may have, and the combined amount is treated as the deposit towards the mortgage. Once your LTV reduces over time (by repayments and house value rises), your parents have their money returned and you carry on as normal.

Here's an independent Which article: http://www.which.co.uk/money/mortgages-and-property/guides/first-time-buyer-mortgages/parent-mortgages/

I'd also read a couple of provider's pages to get a feel for the idea: https://www.barclays.co.uk/Mortgages/FamilySpringboardMortgage/P1242627640100 or http://www.scottishbs.co.uk/mortgages/guarantor-mortgage-for-first-time-buyers.html or http://www.mhbs.co.uk/family_deposit_mortgage_1_50_discount_for_term.aspx Not endorsements obviously, just a way to understand the concept and get a feel for the language they use.

In short, using the money indirectly is much cleaner than your parents actually just giving you such a large sum and then you having to pay it back.

  • Let's say I go for the loan option, do I need to tell HMRC about the loan? My parents would send the money to my bank account, would they ask about that transfer? – algiogia Apr 13 '15 at 10:55
  • My understanding is that you would not have to tell them. The difficulty arises if your parents were to pass away within 7 years. This would then mean that the gift could be included in an Inheritance Tax investigation. Annual limit is only £3,000 per person annually (so £6,000 from both parents in total) and this is likely less than the sum you are talking about here. This article answers the question you pose: theguardian.com/money/2013/dec/18/… – Chris Apr 13 '15 at 12:33
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If your parents were resident but not domiciled in the UK and were using the Remittance Basis in the year when they got the income or gains from which they're now lending you this money that could trigger UK income tax and or capital gains tax on the money the transfer to the UK whether to an account of their own or directly to your account. If they were non resident or using Arising Basis or it was UK income then this is not an issue.

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As regards Inheritance Tax if your parents are abroad the question must be asked about their Domicile status as non doms are generally only subject to IHT on assets situated in the UK.

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