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Sam
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Category: Tax
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My sister is going to lend me funds to develop a property.

Resolved Question:

My sister is going to lend me funds to develop a property. She does not own a property in UK or abroad? What is her tax libaility when the property is sold?
Submitted: 3 years ago.
Category: Tax
Expert:  Sam replied 3 years ago.
Hi

Thanks for your question. I am Sam and I am one of the UK tax experts here on Just Answer.

Could you advise in whose name the purchase will be made - as you seem to suggest the money will be lent to you, and you will make the purchase in your sole name.
Or will this be a partnership (joint names) or a limited company.


If it is in fact, to be in joint names (as a partnership or limited company) please advise how long she has been outside of the UK as not resident (so with visits less than 90 days each tax year) and will you ever live in the property, or is it to be developed and then sold.

If in just your sole name, will she be paid interest back with her original loan made to you?

If its just to be developed and then sold, have you done this before, or intend to do this again? As I need to establish whether the profits made, fall into a capital gain transaction, at the time of sale, or whether HMRC will treat this as a trade income.

Thanks

Sam


Customer: replied 3 years ago.

The property will be solely owned by me. It will be my only property. Yes, I have done this before but over the long term ie. I bought a property and sold after 3 years.


 


We have agreed her loan to develop the property will be repaid by the the percentage put into the property by her at the sale of the property. It will take about a year to do up the property and she is happy with this. We would then sell it and she would take her percentage out which we hope will have increased as the property will be worth more developed.

Expert:  Sam replied 3 years ago.
Hi Catherine

Thanks for your response

Then she will have no UK considerations, as the only income she will make, will be by virtue of what you give her back over and above the original loan amount when the property is sold.
This will not give rise to a UK tax liability, but she will need to establish the tax position in her country of residence as this additional income may give rise to a tax liability there (as it would do had she been UK resident)

The following is information for you and your tax position (which you may well be aware of, so forgive me if that is the case)

You then do need to register as a trade developer for tax purposes, as your profit will be liable to income tax rather than capital gains, so you need to register for self assessment as a sole trader.

Link here for you to do this once you have started the develop.
https://online.hmrc.gov.uk/registration/newbusiness/introduction

You will then file self assessment tax returns with self employment income and expenditure, which will include the interest element of the repayment made back to your sister as an allowable expense, once the property has been sold (so this will the amount over and above the amount she loaned you)

Thanks

Sam




Customer: replied 3 years ago.

Thank you...sorry a bit bogged down in guests so couldn't finish this yesterday.


 


Just a final question. My sister currently lives in New Zealand but has dual residency with UK. She recently was divorced and is looking at many options in life. If she did choose to move here what would her tax implications be?

Customer: replied 3 years ago.

Sorry, I don't know if the last email got through to you...the reply didn't to me.


 


So my last question was to ask what my sister's tax liability would be if she came here from New Zealand and settled back in the UK?

Expert:  Sam replied 3 years ago.
Hi Catherine

Thanks for your response

If the repayment is made to her in any tax year where she is treated as a resident (so physically present and treated as resident for that tax year) then she will be liable to income tax on the profit made.

Thanks

Sam
Customer: replied 3 years ago.

Thank you and finally I assume if she transfers funds to me in the UK and there is proof that they are from the sale of the property in New Zealand (following divorce) then the funds will be ok and clear for money laundering? So, is proof of sale from contracts exchanged from her solicitor enough to achieve this?

Expert:  Sam replied 3 years ago.
Hi

Thanks for your further question - this really should be listed as a new question as per Just Answer policy - as this is getting more into the origins of money she plans to loan you(I did answer the last one due to the fact it was connected to residency and this was your first time on Just Answer) But again I will finish this topic off, please could I trouble you to rate the level of service I have provided on this matter, so I am credited with my time - thanks

Ok, onto your next question

The bank deal with aspects such as money laundering - rather than this being a tax issue.

But I would for warn your bank of the expected funds, and make sure there is appropriate documentation to support the paper trail of these funds.
So
1) proof of the sale of her property along with details showing her share of the profits
2) Paperwork from her to you detailing the loan made, how much, when it was loaned and when it will repaid and that it builds into it the additional payment from the eventual refurb sale that will be paid
3) A direct transfer from her bank account to yours - having advised your bank of the amount expected.

Then you both have the appropriate documents and paper trail required by any given authority in the UK.

Thanks

Sam
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