Interest Received

Interest Received

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 Very strange circumstances.  Our client Fred borrows a big fat wedge on his mortgage, he lends it to a friend, Ricky, who uses it to get his business going.  The agreement is that Ricky pays interest to our client at the rate he's paying on the mortgage plus 5%.  Bad structure from my view because Fred is taxable on the interest he receives under this agreement, but borowing the money on his mortgage is not a qualifying purpose.  But it was a done deal before Fred came to us.

Flash forward 8 years and the business is very successful. Ricky now wants to give Fred something more than the contractually obliged interest in recognition that his money helped build the business. If he simply gives them money out of the goodness of his heart, or pays their kid's school fees, does this consitute extra interest assessable or can I treat it at some kind of ex-gratia payment?

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By Chris Smail
25th Mar 2011 09:06

Gift

Not contractual = gift 

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By MarionMorrison
25th Mar 2011 16:03

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 That's what I thought - it just seems like potentially open to abuse between parties who trust one another to the extent of putting one rate of interest in the contract and by means of a nod and a wink, operate a higher rate on the success of a project. 

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By blok
26th Mar 2011 10:52

Why is the interest on the mortgage not allowable?

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By MarionMorrison
26th Mar 2011 18:51

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And the qualifying purpose would be??  Instinct tells me it should be allowable, book-checking tells me it isn't.

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By blok
26th Mar 2011 20:21

If the arrangement is commercial, he is acting as a bank. Turnin

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By MarionMorrison
28th Mar 2011 08:18

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Sadly the arrangement isn't commercial - it's private and friendly.  Fred isn't a money-lender, he's not in business to do this. 

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By blok
28th Mar 2011 09:32

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If its not a business or commercial arrangement then I would question why the income is taxable.  What is it?  A gift?  

I bet Ricky claims a deduction is his accounts for the interest paid?

Eight years of steady returns on this investment has merit for arguing that its a commercial arrangement and that associated costs should be taken into consideration.

 

 

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By blok
28th Mar 2011 15:30

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Just taking the concept a stage further with a simlar example.

Fred lets out his Investment flat to Ricky.  Nothing is put in writing because they are friends and they dont need that hassle. They just agree on a rental figure of £x per month. 

Would you treat this as taxable income?  Assuming so, would you deduct interest on the mortgage used to buy the property?

 

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