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Loan from children to parents

House purchase deposit

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My client has recently had an offer accepted on a property. Their existing property is on the market and any sale will not complete in time, so they need to fund the deposit payment on the new property from other sources.

They are trustees of an investment bond for two of their children. They have asked me whether, if the bond is closed, their children can lend them the proceeds of the bond to fund the deposit payment, without tax implications.

I do not believe there would be any tax implications on the child-parent loan (my client is concerned it would be treated as taxable income, but this is not the case for a loan). My client plans to repay his children as soon as the existing house is sold.

I assume that there would also be no tax implications on any interest earned by the children once the loan had been repaid by the parents, as this money was originally an inheritance and did not come from the parents (so wouldn't be caught by the >£100 interest rule)

There is obviously the consideration as to whether now is the right time to liquidate the bond, but they had planned to do so in the next couple of years in any case to fund university fees.

Are there any other considerations that I need to be aware of?

Thank you in advance for any thoughts.

Replies (9)

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By paul.benny
28th Apr 2021 11:54

I'll leave commenting on the tax to people who might know what they're talking about.

Make sure loan is fully documented, including agreement to repay from proceeds of sale of house, and that conveyancing solicitor is instructed to repay loan on completion.

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Replying to paul.benny:
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By sparkler
28th Apr 2021 11:57

Thank you Paul for your helpful reply.

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By lesley.barnes
28th Apr 2021 11:59

Just a few thoughts

Does the wording of the trust allow the trustee's to borrow the money? Do they have to pay interest on the money borrowed if the trust allows it? Can the fund be accessed before the child is 18? I think you may need to get hold of a copy of the trust document to see what issues there could be.

The lender may be sniffy about them borrowing money for a deposit. Usually it has to be a gift. I know when my son bought his house I had to sign a document witnessed by a solicitor to say that money I gave him was a gift and I didn't want it to be repaid.

Your client may need to speak to their solicitor and get a formal document drawn up to protect the childrens interest.

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Replying to lesley.barnes:
By Duggimon
28th Apr 2021 12:08

lesley.barnes wrote:

The lender may be sniffy about them borrowing money for a deposit. Usually it has to be a gift. I know when my son bought his house I had to sign a document witnessed by a solicitor to say that money I gave him was a gift and I didn't want it to be repaid.

That is a very good point, lenders will not consider a deposit paid with a loan as a deposit.

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Replying to Duggimon:
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By sparkler
28th Apr 2021 12:15

Yes, a good point, thank you. I suppose if it is effectively a "bridging loan" the lender may be more amenable, as it is clear they will have the funds to repay the loan as soon as they sell the second property. Certainly something for them to check with the lender though.

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By Tax Dragon
28th Apr 2021 16:35

I'm not quite understanding

sparkler wrote:

they are trustees of an investment bond

Are you saying (as Lesley maybe assumes) that there's a trust (what sort?) with a bond in it, or simply that they hold a bond as nominees for minor children? Obviously surrendering the bond early might not be best investment advice (not something I can comment on further) and may have tax consequences, but I assume that's not what you were asking about.

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Replying to Tax Dragon:
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By sparkler
28th Apr 2021 17:22

I don't have any more details, but have anyway explained to my client that I cannot give any kind of investment advice and they will need to refer to a specialist.

My client simply wanted to understand if there were any tax implications of taking a loan from their minor children.

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Replying to sparkler:
paddle steamer
By DJKL
28th Apr 2021 18:44

If parents are the trustees of a trust for their presumably minor children the first place I would like to have checked is their legal duty of care as trustees, liquidating a trust asset and then either the trust ,or their children via a distribution from the trust (ages not disclosed, but pre university), lending a sum to the parents- if not arms length it smells bad.

The terms of the trust need examined and legal guidance regarding their actions as trustees needs looked at, whilst I have heard of trusts lending funds a long time ago, in the 1950s a life trust set up by my grandfather for his sister with my mother as the ultimate beneficiary advanced my parents money for a house purchase, the interest they paid providing part of the trust income, but this trust was not managed by my parents (solicitors) but had a third party Dundee firm of solicitors as trustees and the loan was fully documented with the trust holding a security over the property purchased, I suspect these days even that form of arrangement might be frowned upon.

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Replying to sparkler:
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By Tax Dragon
29th Apr 2021 09:11

How can you comment (or expect us to comment) on a situation when you don't know what the situation is?

I'd be fairly questioning of borrowing from minors, though I don't know what the law says*. I'm more clued up on the law about trustees borrowing from a trust that they are obliged to operate for the benefit of beneficiaries... and my comment about (it) maybe not being best investment advice was in that context. Just read the first 4 or 5 sections of Trustee Act 2000, for example, to get a flavour. (Then reread DJKL's comment, with clearer understanding.)

*Possibly it's the same law. A bare trust is still a trust.

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