Loan between 2 brothers

Loan between 2 brothers

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My client has lent some money to his brother to buy a buy to let property (c£20k). His brother has been repaying him and also paying interest to cover his cost (he extended his mortgage). Would you declare any of this on his tax return or is it just an informal family arrangement?
Presumably if the interest receivable is declared, then the interest paid on the mortgage could be claimed and therefore offset it anyway, but is it necessary given that it is all within the family rather than a commercial loan?
anon

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By thehaggis
15th Jan 2009 23:41

Interest?
Apparently interest can only arise if there is an obligation to pay it. If the brother is voluntarily paying something to cover costs incurred, I don't think it can be interest.

See EIM26250. The revenue uses this to deny a deduction in beneficial loan calculations. It could quite easily be turned around.

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By User deleted
16th Jan 2009 12:30

taxable interest
Seems to me there are two situations -

Brother 1 has extended his mortgage by £20K and loaned it to his brother. He receives interest which, as Simon correctly states, is taxable under D3. There is no deduction for the extra interest he pays on his mortgage. Not fair? Of course not but since when has tax been fair?

Brother 2 is paying loan interest to acquire a BTL property and the interest is allowable against the rental income.

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By pawncob
16th Jan 2009 11:18

You said it
Your question specifically stated that he was paying his brother interest, not just meeting the capital repayments.
Seems like Schedule D Case 3 to me.

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Euan's picture
By Euan MacLennan
16th Jan 2009 11:14

No tax?
On what basis would the brother be able to claim relief for the interest paid on the loan to fund the client's investment in a letting property? Perhaps if the client and his brother were in partnership, but not otherwise. If the client is reimbursing the brother for the interest he is paying, the interest is clearly at a commercial rate. So, in order to suggest that the brother has no tax liability, you would have to rely on claiming that the interest the client pays him on the loan from the brother to the client is not taxable income. Why not? Do you really think that claiming that it is an informal arrangement avoids it being taxable income?

What about the client? If the interest he is paying is not taxable as the brother's income, do you think that the client can claim it as a deduction from his rental income?

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By User deleted
16th Jan 2009 09:15

Simon
Where does the law say it should be declared? I am talking about an informal agreement where the brother who borrowed the money is simply reimbursing his brother and making sure he is not out of pocket. I can find no guidance in any of the manuals about this type of arrangement. I don't want to break the law, but I would really like some clarification.

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By pawncob
15th Jan 2009 18:16

same difference
The law says you should declare it, so why disobey the law?

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