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taxadvisor.uk
taxadvisor.uk, Chartered Certified Accountant
Category: Tax
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Experience:  FCCA - over 35 years experience as a qualified accountant (UK based Practitioner)
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My parents have lent me some money to buy a buy to let property.

Resolved Question:

My parents have lent me some money to buy a buy to let property. We have agreed that rather than have an interest rate on the loan, we will pay them 50% of the profit generated plus 50% of any capital gain if the property is sold. We are unsure how to formally address this in writing so that if anything happens to us or them there is some written evidence to confirm the terms of this agreement. Also, we need to know that when filling in our tax returns that this agreement will be recognised. i.e. I only have to declare half of the rental income.
Submitted: 1 year ago.
Category: Tax
Expert:  taxadvisor.uk replied 1 year ago.
Hello and welcome to the site. Thank you for your question.

If you have other parties to the purchase agreement (i.e.your parents), you may wish to consider them being put on the title deeds so that financial interests are formalised.

If the property is in your sole name then you are responsible to HMRC on tax due on rental income and CGT. You could not show half the rental income and half the eventual gain on sale of the property without some declaration to support it.

I would recommend you talk to the solicitor dealing with conveyance to incorporate the aforementioned financial interest in the form of a statutory declaration or deed.

I hope this is helpful and answers your question.

If you have any other questions, please ask me before you rate my service – I’ll be happy to respond.

Customer: replied 1 year ago.

Hello, what about the formalisation of the loan agreement? You haven't mentioned that part. The question relates to the loan rather than the property. Assuming the flat is 100% in my name, I presume that I can write off the costs of the loan against the income of the flat. My parents can then declare an income from the loan an declare that in their tax return.

Expert:  taxadvisor.uk replied 1 year ago.
Thank you for your reply.

Formalisation of a loan agreement. If you are making a payment to your parents against a loan, it is effectively loan interest and you should deduct tax at source before giving the net amount. They would then report that as income in their tax return.

An formal loan agreement would have terms of repayment of loan and interest applicable on the loan. You would then charge interest paid on that loan as an allowable expense against rental income.

To safeguard against any enquiry from the tax man in years to come, you should seek the lawyer's help in drafting the terms of the loan and what is being paid over what period and in particular above share of profit.

I hope this is helpful.
taxadvisor.uk, Chartered Certified Accountant
Category: Tax
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Experience: FCCA - over 35 years experience as a qualified accountant (UK based Practitioner)
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