Equity or Loan

Equity or Loan

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A customers neice is purchasing a flat with a deposit of £50,000. However as a student she has no income.
The Auntie is lending the balance of the money as mortgagee and would like the niece to be responsible when it comes to paying a fair amount of 'interest@ for the loan. As there is no income to service the loan she doesn't know whether to accrue this (and pay income tax on it each year as income) or to place herself as a tenant in common for the value of the loan compared to the overall value of the property and take her share of any gain when the time comes.

This must be quite common - does anyone have any suggestions?
Leonard James

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By AnonymousUser
17th Jul 2006 19:43

More information please
What does the aunt want to achieve? Does she want a part-share of the house as an investment? Also, I'm not entirely sure how the aunt will end up paying income tax on accrued interest payments? Did you mean that the student would be liable for rent under an agreement with the aunt so that the rent due (but not paid due to absence of student income) would be taxed on the aunt? Or were you thinking of the corporate debt rules - these apply only to companies. As far as I am aware individuals are only taxed on interest when received. However, the aunt would not get tax releif for the interest she has paid (unfair as this might seem), so I think this type of arrangement is best avoided.

If the aunt is never going to live in the property and simply wishes to recover her costs at some point without benefitting form the property's increase in value, may I suggest the following may be worth exploring?

The niece borrows the money, possibly on a self-certification mortgage, with the aunt as guarantor. The aunt transfers funds each month to the niece to enable her to make the mortgage payments each month. these amounts are treated as loans to the niece. When the property is sold, the aunt is repaid from the proceeds of the sale. If the property is not sold the niece can take over the payments and the aunt ceases to make the monthly transfers. The aunt should register a legal charge over the property to cover the increasing amounts she is lending the niece. Advantage - no taxable income in hands of aunt either as interest or rent received. Disadvantage - aunt does not benefit from any property inflation.

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